20140217-Maybank_KERPL-More_uncertainties_in_Zengcheng_11页_286kb

KWG Property (1813 HK) Summary

Core Information

• Share Price: HKD4.24
• Market Cap (USD): 1.6B
• Target Price: HKD5.30 (+25% from current price)
• Sector: Real Estate
• Rating: BUY (unchanged)
• Top Pick Status: Removed from Top Pick list, replaced with Franshion

Key Uncertainties and Implications

• Zengcheng Administrative Change:
  Zengcheng and Conghua counties are reclassified as districts under Guangzhou, which may lead to the extension of home purchase restriction (HPR) policies to these areas. This could negatively impact the medium- to long-term transaction volume in Zengcheng, despite a potential short-term spike.

  • KWG has over 20% GFA exposure in Zengcheng (projects include Summit and Gua Lv Lake) out of its total 10.7m sq m landbank.
  • This reclassification may reduce KWG's target price if Zengcheng does not face HPR.

• Project Launch Schedule:
  KWG's project launch pipeline is skewed towards the second half of the year, which could raise concerns about potential project slippages.

  • In January, KWG achieved a 20% MoM and 28% YoY contract sales increase to CNY1.7b.
  • Despite project delays in the past, the company is expected to achieve at least 30% YoY growth in 2014 contract sales.

Valuation and Financial Performance

• Discount to NAV: KWG trades at a 56% discount to its estimated NAV of HKD9.6/share (reduced from HKD10.3/share due to slower sales in Zengcheng and moderate property price growth).
• PE Ratios:
  • Core FD P/E: 3.5x (2014F), 2.8x (2015F)
  • Core P/E: 5.2x (2013F), 3.5x (2014F), 2.8x (2015F)
• P/BV: 0.5x (2014F), 0.4x (2015F)
• Net Dividend Yield: 5.7% (2014F), 6.4% (2015F)
• ROAE: 14.8% (2014F), 16.3% (2015F)
• Net Debt/Equity: 69.6% (2014F), 61.2% (2015F)
• EV/EBITDA: 6.9x (2014F), 5.9x (2015F)

Key Financial Projections (FYE Dec)

2014 Saleable Resources

• KWG's estimated 2014 saleable resources: CNY35-36b
• Expected project launches: At least seven new projects, with a heavier focus on 2H14
• Project delays in 2013 included Guangzhou Knowledge City, Zengcheng Gua Lv Lake, Biological Island Ph 1, and two Fangshan projects

Land Costs and Landbank

• Overall Land Cost: CNY2,900/sq m, which is 21% of 2013 contract sales ASP (CNY13,793/sq m)
• Landbank Quality: Mixed compared to its IPO landbank, with some projects considered lower quality (e.g., Nanning)
• Landbank Size: 10.7m sq m, sufficient for 4-5 years of development

Competitive Position

• KWG is more transparent and offers more margin protection than Hopson and Sunac, making it a better investment compared to some small-cap peers
• Despite the potential HPR extension to Zengcheng, KWG's 30% YoY contract sales growth is still achievable

Downside Risks

• Stricter implementation of China's austerity measures or policy risks
• Poor execution or project slippage
• Slower-than-expected granting of presale permits or tighter liquidity environment

Conclusion

• KWG is maintained as a BUY due to its low valuation (56% discount to NAV), stable gross profit margin, and expected 30% YoY growth in 2014 contract sales
• While Zengcheng's reclassification may bring some risks, KWG's diversified landbank and strong financial position support its investment case
• The company's financial ratios indicate a healthy and growing business, with a strong focus on cost control and asset turnover

Additional Notes

• Share Price Performance:
  • 1 Month: -2.5%
  • 3 Months: -8.8%
  • 12 Months: -22.5%
• Relative to Market:
  • 1 Month: -0.4%
  • 3 Months: -7.4%
  • 12 Months: -18.6%
• Major Shareholders:
  • Kong Family: 61%
  • Morgan Stanley Real Estate: 8%
  • AllianceBernstein: 5%
• Free Float: 39.5%
• Market Capitalization: HKD12.3B
• Issued Shares: 2,893m

Summary of Key Points

• Administrative Changes: Zengcheng's reclassification may lead to HPR extension, affecting long-term sales.
• Project Launches: 2H14 is expected to be the main sales period, with potential for delays.
• Valuation: KWG is undervalued at 56% discount to NAV, with attractive PE and P/B ratios.
• Financial Health: Strong EBITDA and net profit growth, with stable GPM and healthy leverage ratios.
• Landbank: Sufficient for 4-5 years, with mixed quality.
• Investment Case: Maintained as a BUY due to low valuation and growth potential, despite risks.