20160822-美银美林-中国海外发展-00688.HK-A_leading_company_on_consolidation__20__growth_pa_expected__reiterate_Buy_21页_1mb

Summary of COLI's Investment Analysis

Core Content

• Company Overview: China Overseas Land & Investment (COLI) is one of the top three residential developers in China, with projects spanning over 35 cities, including Hong Kong and Macau. It is a subsidiary of the largest state-owned construction company in China. COLI has limited exposure to rental real estate but aims to increase it in the coming years.
• Investment Rating: The analysts reiterate their Buy rating on COLI, citing strong growth prospects for the next five years, assuming the completion of the CITIC property acquisition in March 2016.
• Price Objective (PO): The PO is set at HK$32, based on a 10x FY17 P/E ratio, offering a 19% upside potential from the current price of HK$26.85.

Main Points

1. CITIC Property Acquisition

• The acquisition of CITIC's property portfolio will increase COLI's land bank by 81% to 62mn sq m, with most of the land located in COLI's top 10 cities.
• The average land cost is RMB3,550/sq m, which is 25% of the estimated ASP (RMB15k/sq m), significantly lower than the market average.
• The portfolio is expected to generate RMB450bn in sales over the next 3-4 years, with a gross margin of over 30% and net margin of 15%.
• The acquisition will boost COLI's sales and earnings and may introduce CITIC as a strategic shareholder, enhancing future collaboration.

2. Financial Performance (1H16)

• COLI reported 16% growth in underlying net profit to HK$15.8bn, 11% above the estimate of HK$14.2bn.
• The core net profit rose by 2.2% to HK$13.8bn, slightly above the forecast.
• Gross margin dropped to 28% from 32% in 1H15 due to losses from two URA projects in Hong Kong, but management expects it to return to 30% for the full year.
• Interim DPS increased by 75% to HK$0.35, with a payout ratio of 22%.
• COLI was in a net cash position with HK$8.7bn in cash, but it is expected to turn net debt after the CITIC acquisition.

3. Valuation Metrics

• Price to Book Value (P/B): 1.1x, suggesting the company is trading at a discount.
• Dividend Yield: Increased to 3.0% in 2016E, up from 2.0% in 2014A.
• P/E Ratio: The current P/E is 8.3x (2017E), which is below COLI's 5-year average of 10x.
• NAV Discount: The current stock price is discounted by 25% relative to NAV in 2016E.

4. Future Growth Projections

• COLI's 5-year plan is to double its contracted sales to HK$400bn by 2020, representing a CAGR of 20%.
• The company expects 15-20% profit growth annually, even with a high base.
• By 2020, COLI aims to achieve 4-5% market share in China's property market with RMB350bn in sales, translating to RMB53bn in net profit.
• Underlying net profit is forecasted to rise by 9% to HK$30bn in FY16E and 19% to HK$35.6bn in FY17E.

5. Financial Metrics

• EPS (Earnings Per Share):
  • 2016E: HK$2.93
  • 2017E: HK$3.25
  • 2018E: HK$3.81
• Net Debt-to-Equity Ratio:
  • 2016E: 13.3%
  • 2017E: 12.2%
  • 2018E: 15.4%
• ROE (Return on Equity):
  • 2016E: 13.8%
  • 2017E: 14.6%
  • 2018E: 17.2%

6. Key Financial Changes

• Net Debt is expected to increase to HK$58.5bn after the CITIC acquisition.
• Net gearing is projected to rise to 25%, still below the tolerance level of 40%.
• The book value per share is expected to increase by 3% to HK$21.1.

7. Investment Rationale

• COLI's strong brand, operating capability, and reputation in the Chinese property market are key strengths.
• The company benefits from government support on urbanization and domestic consumption.
• Its land bank is concentrated in Tier-1 and Tier-2 cities, which are key growth areas.

Key Takeaways

• CITIC acquisition is a major catalyst for growth, significantly expanding land reserves and improving margins.
• Gross margin decline in 1H16 is expected to be temporary, reverting to 30% by year-end.
• Profit growth is expected to continue at a decent pace, supported by strong sales and margin management.
• Valuation is currently at a discount, with a 10x FY17 P/E basis suggesting potential upside.
• Debt management is a focus, with efforts to reduce HK$/US$ exposure and increase RMB debt to over 40%.

Risk and Considerations

• The analysts acknowledge potential currency risks due to RMB depreciation and the shift in debt composition.
• The dividend yield is currently low, though the payout ratio is within target.
• The NAV discount may be a factor in the valuation, but the acquisition is expected to be NAV accretive by 12%.

Conclusion

• COLI's Buy rating is reiterated due to its strong growth prospects, strategic CITIC acquisition, and solid financial position.
• The Price Objective of HK$32 offers a 19% upside and is based on 10x FY17 P/E.
• The company is well-positioned for future growth, with a clear 5-year plan and strategic focus on key urban markets.