20160705-DBS_Group-Fundamental_remains_decent,_but_prolonged_major_shareholder_rivalry_likely_to_affect_future_outlook_12页_463kb

China Vanke Summary

Core Content

China Vanke (2202 HK Equity / 000002 CH Equity) is a major player in the Chinese property market, with its stock currently trading at HK$16.42 (H-share) and RMB19.79 (A-share). The report highlights the company's recent performance, valuation, and the ongoing challenges related to major shareholder rivalry.

Main Points

• Sales Performance:

  • Contracted sales in June rose by 17% month-over-month and 68% year-over-year, driven by new launches in tier 2 cities.
  • New subscription sales in June reached Rmb42.9bn, up 20% m-o-m and 57% y-o-y.
  • The average selling price (ASP) declined in June due to a higher contribution from tier 2 cities and lower contribution from tier 1 cities.
  • Total contracted sales in the first half of 2016 amounted to Rmb191bn, a 73% increase year-over-year.

• Valuation Analysis:

  • Vanke-A has been richly valued at 10.8x FY16F PE since its trading resumption on 4 July, and the analysts maintain a SELL recommendation.
  • Vanke-H has corrected by 12% in the past month and is currently trading at 7.7x/6.9x FY16F/FY17F PE, which is not expensive. The analysts maintain a HOLD recommendation but suggest switching to COLI (688.HK) for a cheaper valuation.
  • The PE chart for both H and A shares shows a downward trend over time, indicating potential undervaluation.

• Inventory and Market Trends:

  • Inventory in 14 key cities has been trending down, albeit at a slower pace.
  • Vanke's saleable inventory remained at Rmb100bn at the end of June, which requires about three months to digest.

Key Information

• Management Stability:

  • The management team is likely stable in the near term, as the Board has vetoed Baoneng's proposal to remove existing directors.
  • However, the ongoing major shareholder rivalry may affect management stability in the mid term.

• M&A Strategy:

  • M&A remains a key source of landbanking for Vanke, with six of the 15 new acquisitions in June arising from M&A.
  • Concerns over management stability may hinder future M&A opportunities.

• Valuation Comparison:

  • The report compares China Vanke with other major property companies in terms of market capitalization, trading value, price targets, and PE ratios.
  • Vanke-H is currently trading at a discount to NAV, with a price target of HK$19.19 (17% upside).
  • Vanke-A is considered overvalued and has a price target of RMB16.26 (-18% downside).

• Earnings and Profitability:

  • Earnings per share (EPS) for Vanke-H are forecasted to grow at 11.3% in FY16 and 11.4% in FY17.
  • The company's ROE has remained stable at around 19% over the past few years, indicating consistent profitability.

• Peer Comparison:

  • The report provides a detailed comparison of PE valuations for multiple companies from 2007 to 2015, highlighting that China Vanke's PE is relatively lower compared to its peers in recent years, suggesting potential value.

Analysts

• Ken HE CFA: +86 21 6888 3375; ken_he@hk.dbsvickers.com
• Carol WU: +852 2863 8841; carol_wu@hk.dbsvickers.com
• Danielle WANG CFA: +852 2820 4915; danielle_wang@hk.dbsvickers.com
• Andy YEE CFA: +852 2971 1773; andy_yee@hk.dbsvickers.com

Summary Table

Valuation Trends

• PE Valuations:

  • The PE has decreased over time, suggesting a more reasonable valuation in recent years.
  • Vanke-H is currently trading at 7.7x FY16F PE and 6.9x FY17F PE, which is relatively low compared to its historical levels.

• Discount to NAV:

  • Vanke-H is currently trading at a discount to NAV, with a price target of HK$19.19.
  • The discount to NAV for Vanke-H is 1.6x, while for Vanke-A it is 1.0x.

• P/B Ratio:

  • Vanke-H's P/B ratio is 1.2x, and Vanke-A's is 1.0x, indicating potential undervaluation.

Conclusion

China Vanke has shown strong sales growth in June, driven by tier 2 city developments, but faces challenges due to prolonged major shareholder rivalry. The management team is likely to remain stable in the short term, but the uncertainty surrounding future M&A opportunities and shareholder dynamics may affect the company's outlook. While Vanke-H is currently undervalued and has a reasonable PE, the analysts maintain a HOLD recommendation due to uncertainties. Vanke-A, on the other hand, is overvalued and recommended for a SELL. The report suggests switching to COLI (688.HK) for a cheaper valuation.