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报告摘要

Guangzhou R&F Properties Summary

Core Content

Guangzhou R&F Properties (2777 HK) is a Chinese real estate developer currently trading at HKD9.74 with a target price of HKD12.00, representing a 23% increase. The company's market capitalization is USD4.0B, and its average daily trading volume (ADTV) is USD9M. The stock is currently trading at a 55% discount to its net asset value (NAV) of HKD21.80, with a 4x FY14F PER, 0.7x FY14F P/B, and an 8.5% dividend yield.

Main Points

Contract Sales: R&F set a high contract sales target of CNY70b for 2014, which is a 65.9% YoY increase from the previous year's actual sales of CNY42.2b. This target does not include contributions from Malaysia, where the chairman expects CNY5b in contract sales from CNY8.4b of saleable resources.
Gross Profit Margin (GPM): The GPM for FY13 was 39.2%, beating expectations. It is expected to drop to 36.0% in 2014 due to the absence of Pearl River New Town office buildings and to rebound to 37.1% in 2015 with the completion of the Guangzhou Yingyao Grade A office building, which has a GPM of over 60%.
Dividend Payout Ratio: FY13's DPS was CNY0.62, which is 5% below consensus. The dividend payout ratio for FY13 was 34.7% of core profit, down from 38.7% in 2012. The ratio is expected to decrease to 33% and 32% for 2014 and 2015, respectively.
Debt Profile: The company has a high net gearing ratio, with net debt to attributable equity rising to 115.6% in Dec-13. This is expected to increase further to 121.8% by end-2014 due to land premium payments and a delivery schedule skewed towards the second half of the year.
Financial Performance: The company is expected to maintain strong revenue growth of over 20% YoY from 2014 to 2016E, with core profit growth of 13% in 2014, 21% in 2015, and 11.7% in 2016. However, core profit growth is not particularly impressive.
Land Acquisitions: In FY13, R&F spent CNY43.4b on land, expanding into 10 new cities and Malaysia. The average land cost was CNY2,100/sq m, which is manageable. The company's land acquisition was spread across different city tiers and regions, with Tier-3 cities accounting for 35% of GFA and Malaysia for 17%.

Key Information

GPM Trends: The GPM is expected to fall from 39.2% in 2013 to 36.0% in 2014, then rebound to 37.1% in 2015.
Sales Expectations: The company expects to achieve CNY65-70b of contract sales in 2014, with over CNY141b of saleable resources. It plans to launch 25 new projects in 2014, contributing 35% to total contract sales, compared to less than 10% in 2013.
Debt and Leverage: The net debt to total equity ratio increased from 99.5% in June-13 to 110.8% in Dec-13, and is expected to rise further to 121.8% by end-2014. Short-term debt rose by 92.5% HoH to CNY18.1b, with a high proportion of total debt.
Performance Relative to Peers: R&F's valuation metrics are in line with other Chinese property developers, with a P/E ratio of 3.9 for FY14E and a P/BV ratio of 0.7. The company is trading at a discount to NAV, indicating potential undervaluation.
Management Guidance: The company's management is optimistic about its performance, but the high gearing and the potential for increased SG&A expenses remain concerns.

Summary of Key Financial Metrics

Metric	FY12A	FY13A	FY14E	FY15E	FY16E
Revenue (CNY m)	30,365.1	36,271.3	45,761.3	55,319.5	66,989.5
Core Net Profit (CNY m)	4,993.3	5,764.3	6,501.3	7,846.2	8,763.1
Core EPS (CNY)	1.55	1.79	2.02	2.43	2.72
Core EPS Growth (%)	13.6	15.4	12.8	20.7	11.7
DPS (CNY)	0.60	0.62	0.67	0.78	0.87
Core P/E (x)	5.0	4.4	3.9	3.2	2.9
P/BV (x)	1.0	0.8	0.7	0.6	0.5
Dividend Yield (%)	7.7	7.9	8.5	10.0	11.1
ROAE (%)	20.1	19.1	18.1	19.0	18.5
GPM (%)	40.8	39.2	36.0	37.1	35.2
Net Debt/Equity (%)	86.0	115.6	121.8	111.7	105.9

Key Figures and Trends

Land Acquisition: R&F spent CNY43.4b on land in FY13, expanding into 10 new cities and Malaysia. The average land cost was CNY2,100/sq m.
Project Launches: In 2014, the company is targeting 25 new project launches, contributing 35% to total contract sales, compared to 7 in 2013.
GPM Impact: The completion of the Guangzhou Yingyao Grade A office building is expected to help stabilize GPM in 2014 and 2015, but its high margins are not expected to be realized until 2015.
Dividend Outlook: The dividend payout ratio is expected to decrease to 33% in 2014 and 32% in 2015, due to management's focus on maintaining high gearing and controlling expenses.
Valuation Metrics: R&F is trading at a 55% discount to NAV, with a 4x FY14F PER and a 0.7x FY14F P/B, indicating potential undervaluation.

Conclusion

Despite strong revenue growth and a high contract sales target, Guangzhou R&F Properties faces challenges related to high gearing and the potential for increased SG&A expenses. The company's GPM is expected to decline in 2014 but rebound in 2015 with the completion of key projects. The stock is currently undervalued relative to its NAV, with a high dividend yield and manageable cash flow. However, the company's financial performance and valuation metrics are not particularly impressive, and the risk of increased debt remains a concern.

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