20140207-Maybank_KERPL-Buy_one_get_one_free__Initiate_BUY_21页_832kb

Franshion Properties (817 HK) Summary

Core Content

Franshion Properties (817 HK) is a Chinese real estate company that is expected to deliver strong sales and profit growth due to its property development and primary land sales, as well as the potential spin-off of its investment property (IP) portfolio. The company is currently trading at HKD2.37 with a market capitalization of approximately HKD21.7B. The target price is HKD3.32, representing a 40% discount to NAV, which is lower than the sector average of 54%.

Key Points

• Sales Growth:

  • Franshion has experienced strong sales growth since 2011, with a CAGR of 28%.
  • In 2013, sales increased by 35% YoY to CNY21b.
  • For 2014, the company is forecasted to achieve CNY28b in total sales, a 33% YoY growth, surpassing the sector average.
  • The company aims to break through the CNY20b property sales mark in 2014.

• Profit Growth:

  • Core net profit is expected to grow at a CAGR of 38.6% from 2011 to 2015.
  • In 2013, core net profit reached HKD3.1b, up 48.1% YoY.
  • For 2014 and 2015, core net profit is forecasted to rise by 23.7% and 30.2%, respectively, to HKD3.8b and HKD5.0b.

• Potential Spin-Off of IP Portfolio:

  • The potential spin-off of the IP portfolio is a key catalyst for value unlocking.
  • Assuming gross rental income of HKD3.5b, a net distributable income margin of 35%, and a required yield of 6.5%, the market cap of the new entity could reach HKD18.8b, which is approximately 88% of Franshion's current market cap.
  • The spin-off could provide additional funding and accelerate construction.

• Asset Value Realization:

  • The IP portfolio, including office, retail, and hotel assets, is a significant contributor to recurring income.
  • Franshion's IP portfolio generates an estimated HKD3.5b in annual revenue, with potential to increase to HKD6.0b once the under-construction projects are completed.

• Investment Grade Status:

  • Franshion has an investment grade credit rating, supported by its low gearing and recurring cash flows.
  • In 2012, it raised USD500m through senior notes with a coupon rate of 4.7%, significantly lower than peers.

• Financials and Valuation:

  • Franshion's financials are robust, with a net debt-to-equity ratio of 59.6% as of 2013, slightly lower than the sector average of 67%.
  • The company has HKD11.5b in cash on hand as of end-2013.
  • The company's core FDEPS is expected to grow at a CAGR of 23.6% from 2013 to 2015.

• Recurring Income and Brand Strength:

  • Franshion owns the landmark Jinmao Tower in Shanghai, contributing to its strong brand recognition.
  • The company's IP portfolio includes 4 completed office/retail buildings and 7 five-star hotels, with a total leasable area of 350,741 sq m and 3,106 rooms.
  • The company's recurring income from IPs and hotels is a key differentiator.

Main View

Franshion is expected to trade at a premium to its peers due to its strong sales growth and the potential spin-off of its IP portfolio. The two-fold re-rating story includes:

1. High Sales Growth: The company is forecasted to achieve above-sector average sales growth, with a 33% YoY increase in 2014.
2. Asset Value Realization: The potential spin-off of its IP portfolio could unlock significant intrinsic value, with the new entity's market cap potentially reaching 88% of Franshion's current market cap.

Key Information

• Share Price: HKD2.37

• Market Cap (USD): 2.8B

• Target Price (HKD): 3.32 (+40%)

• ADTV (USD): 2M

• Sales Growth Forecast (2014): 33% YoY

• Core Net Profit Growth (2014): 23.7% YoY

• GPM: Expected to remain close to 40% for 2015

• Spin-off Potential: Could unlock intrinsic value of IP portfolio, with a market cap of ~HKD19b

• Major Shareholders:

  • Sinochem Hong Kong (Group) Co. Ltd (63%)
  • GIC Pte Ltd. (5%)
  • Warburg Pincus LLC (2%)

• Project Launches in 2014:

  • Expected to launch at least five new projects, bringing total saleable resources to ~CNY26b
  • Includes projects in Changsha, Beijing, Suzhou, and Lijiang

• Land Sales:

  • In 2013, land sales reached CNY6.4b with a GFA of 2.13m sq m
  • Expected to reach ~CNY7.5b in 2014, including new projects in Sanya and Changsha

• Underlying Net Profit (2013-2015):

  • FY13: HKD1.34b
  • FY14: HKD3.8b
  • FY15: HKD4.95b

• Valuation Metrics (2013-2015):

  • Core FD P/E: 19.1 (2013), 8.3 (2014), 5.2 (2015)
  • P/BV: 1.0 (2013), 0.6 (2014), 0.6 (2015)
  • Net dividend yield: 1.7% (2013), 4.5% (2014), 5.8% (2015)

• Gearing and Financing:

  • Net debt-to-equity ratio: 59.6% (2013)
  • Blended financing cost: ~6.2% (lower than peers)
  • Expected cash inflow for 2014: CNY26-27b
  • Expected cash outflow for 2014: CNY26b

• Investor Interest:

  • The spin-off of the IP portfolio is a major catalyst for investors.
  • The company's strong earnings growth and asset value realization are expected to support a premium valuation.