20140626-Maybank_KERPL-Guangzhou_R_F_Properties_2777_HK_Managing_the_market__U_G_to_BUY_15页_2mb

Guangzhou R&F Properties (2777 HK) Summary

Core Content and Overview

Guangzhou R&F Properties (2777 HK) is a Chinese real estate developer that has been upgraded to a BUY rating by Maybank Kim Eng. The current share price is HKD9.40, with a target price of HKD11.70 (+24%). The company has a market capitalization of USD3.9B and an average daily trading volume (ADTV) of USD9M. The stock offers a 10% FY15 yield, making it an attractive investment for income-focused investors.

Key Financial Highlights

• Revenue (FYE 31 Dec, CNY m):

  • FY12A: 30,365.1
  • FY13A: 36,271.3
  • FY14E: 45,627.5
  • FY15E: 54,897.9
  • FY16E: 68,734.3

• EBITDA (FYE 31 Dec, CNY m):

  • FY12A: 10,629.4
  • FY13A: 12,208.0
  • FY14E: 12,544.9
  • FY15E: 14,977.7
  • FY16E: 17,774.1

• Core Net Profit (FYE 31 Dec, CNY m):

  • FY12A: 4,993.3
  • FY13A: 5,764.3
  • FY14E: 6,456.2
  • FY15E: 7,631.6
  • FY16E: 8,782.8

• Core EPS (CNY):

  • FY12A: 1.55
  • FY13A: 1.79
  • FY14E: 2.00
  • FY15E: 2.37
  • FY16E: 2.73

• Core EPS Growth (%):

  • FY12A: 13.6
  • FY13A: 15.4
  • FY14E: 12.0
  • FY15E: 18.2
  • FY16E: 15.1

• Net DPS (CNY):

  • FY12A: 0.60
  • FY13A: 0.62
  • FY14E: 0.64
  • FY15E: 0.73
  • FY16E: 0.84

• Core P/E (x):

  • FY12A: 4.9
  • FY13A: 4.2
  • FY14E: 3.8
  • FY15E: 3.2
  • FY16E: 2.8

• P/BV (x):

  • FY12A: 0.9
  • FY13A: 0.8
  • FY14E: 0.7
  • FY15E: 0.6
  • FY16E: 0.5

• Net Dividend Yield (%):

  • FY12A: 7.9
  • FY13A: 8.2
  • FY14E: 8.5
  • FY15E: 9.7
  • FY16E: 11.2

• Net Debt/Equity (%):

  • FY12A: 86.0
  • FY13A: 115.6
  • FY14E: 121.7
  • FY15E: 112.8
  • FY16E: 103.3

Key Projects and Sales Outlook

• Tianjin Intelligent Palace (Shangyue Court):

  • Expected launch in late-July/early-August 2014.
  • Target sales: CNY0.5b.
  • Estimated ASP for initial launch: CNY8k/sq m for apartments.
  • Project size: 231k sq m.
  • Location: Core area of Wuqing district, close to high-speed rail and shopping malls.

• Taiyuan R&F City:

  • Seven planned phases, with the latest having an ASP of CNY7.5-7.7k/sq m.
  • Total sales target for 2014: CNY4b.
  • Sales locked in as of May 2014: CNY1.3b (33% of target).
  • Project includes an office component (38k sq m) and retail (37k sq m) for rental.

• Meizhou R&F City:

  • Delayed in obtaining presale permit, originally planned for June 2014.
  • Expected to launch in late-July/early-August.

• Shanghai Hongqiao Project:

  • Expected to launch in July 2014.
  • Estimated ASP: CNY45k/sq m.
  • Land cost: CNY14,500/sq m.

• Tianjin R&F Tuanbohu:

  • Estimated ASP: CNY10k/sq m.

• Guiyang R&F Center:

  • Estimated ASP: CNY11-12k/sq m.

• Malaysia Project - R&F Princess Cove:

  • Show flats opened last week.
  • Expected launch in one or two months.
  • Target sales: CNY1-2b.
  • Estimated ASP: CNY17-18k/sq m.

Sales and Market Performance

• 2014 Contract Sales Target: CNY70b.
• Estimated 2014 Contract Sales: CNY62b, a 12% miss.
• June 2014 Sales: Estimated at CNY3-3.5b.
• July 2014 Sales: Expected to rise to CNY5-5.5b with new launches.
• Slow 2Q Sales: May have contributed to recent share price weakness.
• Gearing: Expected to peak at ~120% in 2014, high but in line with market expectations.

Competitive Position and Margins

• Margins: Estimated GPM at 35.6% for 2014 and 35.8% for 2015, which is more defensible compared to peers like Country Garden and Yuexiu Prop.
• Reasons for Stronger Margins:
  • Diverse product mix.
  • Reasonable land costs (CNY1,700/sq m as of end-2013).
  • Projects in various-tier cities.
• GPM Stability: Unlike some peers, R&F is expected to maintain stable margins in 2015.

Valuation and Investment Rationale

• Target Price: HKD11.70, based on a 50% discount to NAV estimate of HKD23.4/share.
• Current Valuation:
  • 3.8x 2014 PER.
  • 3.2x 2015 PER.
  • 0.66x 2014 P/B.
  • 0.57x 2015 P/B.
• Dividend Yield:
  • 8.5% for 2014.
  • 9.7% for 2015.
• Historical Valuation Context:
  • The stock is trading at -1 standard deviation below its six-year average.
  • During the 2008 GFC trough, R&F traded at 2.5x PER and 0.58x P/B, suggesting current valuations are attractive.

Downside Risks

• Worse-than-expected sales and margins.
• Unfavorable macroeconomic environment.
• Tough refinancing environment.
• 29% of total debt due within one year as of end-2013.

Conclusion

Despite the recent share price weakness due to a 12% miss in contract sales for 2014, the stock is viewed as a BUY due to its defensive margins, diverse project portfolio, and attractive valuation. The company is expected to see a sales pick-up in July 2014, with several new launches and the potential for good news from the competition with Country Garden's Forest City project in Malaysia. The high dividend yield and potential for margin stability make it an appealing investment option.