20140331-DBS_Group-Central_China_Real_Estate_Solid_growth_with_contained_risks_16页_280kb

Central China Real Estate Summary

Core Content

Central China Real Estate (832 HK) is a property development company with a focus on the Henan province. The report from DBS Group Research provides an analysis of the company's financial performance, growth prospects, and valuation metrics, with a BUY recommendation and a 12-month price target of HK$3.25.

Key Financial Highlights

• FY13 Results:

  • Reported Net Earnings: Rmb1,085m (+25% y-o-y)
  • Core Earnings: Rmb900m (5% below estimates, 18% below consensus)
  • Revenue: Rmb6.95bn (lower than estimates of Rmb8.5bn-9.1bn)
  • Gross Margin: 34% (down 1ppt from 35% in FY12)
  • Net Profit: Rmb1,026m (up 24% y-o-y)
  • EPS (RMB): 0.42 (up 25% y-o-y)
  • EPS (HK$): 0.54 (up 24% y-o-y)
  • DPS (HK$): 0.159 (yield of 8.3%)
  • Net Gearing: 37% (in line with estimates)
  • ROE: 18.3% (down 1.5ppt from previous year)

• 2014 Forecasts:

  • Sales Target: Rmb17.2bn (up 23% y-o-y)
  • Core Earnings CAGR: 20% over the next five years
  • Gross Margin: Expected to remain above 30%
  • Net Profit: Rmb1,135m
  • EPS (RMB): 0.47
  • EPS (HK$): 0.60
  • DPS (HK$): 0.18 (yield of 8.9%)
  • Net Gearing: Expected to increase to 43%
  • ROE: 17.7% (projected)
  • P/Book Value: 0.6x (vs. small cap average of 4.7x)
  • PE (14F): 3.4x
  • Dividend Yield: 8.9% (projected for 2014)

Key Business Strategy

• Land Acquisition: The company maintains a disciplined land acquisition strategy, with a focus on lower-tier cities. The average land cost in 2013 was Rmb663/sm, and it plans to expand its land bank if land costs remain reasonable.
• Sales Mix: Expected to shift towards higher ASP products (Rmb6-11k/sm), which should improve gross margins.
• New Projects: Plans to launch 36 new projects in 2014, with 14 in the first half. These projects are expected to contribute 55.3% of the sales target.
• Presales: 83% of the targeted presales will be from cities without HPR policy, indicating a strategic focus on less regulated markets.

Operational Performance

• Inventory: Rmb10bn at end-2013 (up from Rmb7bn in FY12), with Rmb5.8bn in unrecognized sales.
• GFA Completion: 2.38m sm in FY14 (down from 2.9m sm in FY13) due to a higher proportion of high-rise developments.
• Construction Starts: Plans to commence 43 projects with GFA of 4.19m sm, up 48% y-o-y.
• Hotel Operations: Currently operating four hotels with an average occupancy rate of 24% (up from 21% in 2012), and may consider divesting them when they mature.

Market Position and Valuation

• Market Share: Targeting 10% in Henan over 10 years, with a goal of Rmb30bn in sales by 2016.
• Valuation:
  • PE (14F): 3.4x (vs. small cap average of 4.7x)
  • P/Book Value: 0.6x (vs. small cap average of 4.7x)
  • EV/EBITDA: 2.6x
  • Discount to NAV: 72% (current price at 3.4x PE, 0.6x P/BV)
  • Dividend Yield: 8.3% (based on FY13)
  • Dividend Payout Ratio: 30%

Analyst Recommendations

• DBS Recommendation: BUY due to decent growth outlook and attractive dividend yield.
• Price Target: HK$3.25 (based on 5.5x PE)
• Broker Recommendations:
  • Buy: 3
  • Sell: 0
  • Hold: 1

Risk Factors

• Construction Delays: A delay in receiving property ownership certificates in Luoyang affected GFA delivery in FY13.
• Inventory Levels: Inventory in Zhengzhou is at 6 months, which may limit the removal of HPR policy.
• Mortgage Tightening: Could slow down cash collection, but the company benefits from favorable bank credit due to its size in Henan.
• GFA Mix: Higher proportion of high-rise projects increases development time and may affect short-term growth.

Summary

Central China Real Estate is positioned for solid growth with a disciplined land acquisition strategy that supports above 30% gross margins. The company aims for a 20-30% CAGR in sales and 20% CAGR in core earnings over the next five years. Despite FY13 results being below market expectations, the BUY recommendation is maintained due to attractive valuations, high dividend yield, and low execution/financial risks. The company's strategic focus on Henan province and lower-tier cities, along with its diversified project portfolio, supports its growth potential and operational stability.