20140821-Maybank_KERPL-Gearing,_margin_concerns__D_G_to_HOLD_12页_1mb

Country Garden (2007 HK) Summary

Core Content Overview

Country Garden (2007 HK) is a real estate developer based in China. The analysis covers its financial performance, valuation metrics, and key concerns regarding its future outlook.

Key Financial Metrics

• Share Price: HKD3.68
• Target Price: HKD4.00 (+9%)
• Market Cap (USD): 9.1B
• ADTV (USD): 20M
• 52-Week High/Low (HKD): 5.71/2.85
• 3-Month Average Turnover (USDm): 20.0
• Free Float (%): 35.3
• Issued Shares (m): 19,080
• Market Capitalization: HKD70.2B
• Major Shareholders:
  • Yang Huiyan: 59.4%
  • Yang Erzhu: 5.3%

Financial Performance

1H14 Results

• Revenue: CNY38.32b, up 42% YoY, representing 46% of full-year forecast
• Property Sales: CNY37,008m, up 44% YoY
• GFA Delivery: 5.35m sq m, up 39% YoY
• Core Net Profit: CNY4.71b, up 14% YoY, ahead of Bloomberg consensus
• Core Net Profit Margin: 12.3%, down 3ppt YoY
• GPM (Pre-LAT): 28.6%, down from 33.9% in 1H13 and 30.3% in full year 2013
• GPM (Post-LAT): 26.2%, down from 29.6% in 1H13

1H14 Cost and Expenses

• Cost of Sales: CNY27,372m, up 54% YoY
• SG&A Costs: CNY1,788m, up 17% YoY
• Administrative Expenses: CNY1,523m, up 74% YoY
• Net Interest Expense: CNY295m
• Capitalized Interest: CNY2,424m, up 27% YoY
• Fair Value Changes: CNY1,244m
• Share of Associates or JCEs (loss on): CNY13m
• Profit Before Taxation: CNY8,764m, up 23% YoY
• Income Tax Expenses: CNY3,165m, up 14% YoY
• LAT (Loss Allowance for Impairment): CNY901m, down 22% YoY
• Net Profit Attributable to Shareholders: CNY5,423m, up 26% YoY

Valuation and Ratios

• Core FD P/E (2015): 4.9x
• P/BV (2015): 1.0x
• Net Dividend Yield (2015): 7.4%
• EV/EBITDA (2014): 5.7x
• Net Debt/Attributable Equity (2014): 67%
• Net Debt/Total Equity (2014): 60%
• Discount to NAV: 36%

Key Concerns

• Gearing and Margin Recovery: Concerns remain about the company's gearing and margin recovery, which may take longer than expected.
• Accounting Adjustments: The company has used accounting treatments that may have inflated its financial results, such as reclassifying some properties as investment properties and treating perpetual securities as equity.
• Margin Concerns: The core NPM dropped 3ppt YoY, and the GPM for 2H14 is expected to be lower than 1H14.
• Land Cost: Newly acquired land parcels have an average cost of CNY1,022/sq m, which is not cheap, leading to a low rental yield of 3%.
• Management Changes: Recent changes in management may delay the realization of operational improvements.

Earnings Forecasts

• Core Net Profit (FY14E): CNY9,660m
• Core Net Profit (FY15E): CNY11,467m
• Core Net Profit (FY16E): CNY12,607m
• Trimmed Earnings: 2016 earnings are trimmed by 6%
• Core FDEPS (2014E): CNY0.51
• Core FDEPS Growth (2014E): 13.9%
• Core FDEPS Growth (2015E): 18.7%
• Core FDEPS Growth (2016E): 9.9%

Investment Recommendation

• Current Recommendation: HOLD
• Downgrade: From previous recommendations
• Upside Risks: Faster-than-expected turnaround and favorable macro developments
• Alternative Investment Opportunities: Better alternatives exist in the sector due to lack of catalysts for CG

Summary of Other Developers

Summary of Key Issues

• Margin Recovery: GPM and core NPM are expected to remain under pressure in 2H14.
• Gearing: Net gearing is higher when adjusted for perpetual securities and revaluation gains.
• Management Changes: New management may not immediately impact operational performance.
• Valuation: The stock trades at a fair valuation, but the company's performance is not compelling.
• Investment Grade: CFO Wu's ambitions for investment grade rating are challenging.

Summary of Valuation Metrics

Conclusion

Country Garden's financial performance in 1H14 shows growth in revenue and core profit, but margin and gearing concerns persist. The company faces challenges in achieving sustainable margin recovery and has a fair valuation. Despite these, the stock is not seen as a compelling investment due to the lack of catalysts and operational improvements.