20140923-大和证券-Initiation__moving_ahead_of_the_curve_31页_3mb

China South City (1668 HK) Summary

Core Content

China South City (CSC) is a leading developer and operator of large-scale integrated logistics and trade centres in China, with a focus on small and medium-sized enterprises (SMEs). The company is initiating coverage with a Buy (1) rating, as it is considered heavily undervalued and a top pick among China industrials and logistics companies.

Main Points

• Business Transformation: CSC is transitioning its traditional trade centres by integrating e-commerce platforms and logistics solutions, in collaboration with Tencent (700 HK).
• E-commerce and Logistics Platforms: The company is developing a new logistics information exchange platform (LIEP) in several inland cities to capture growth from domestic consumption and factory relocation from coastal to inland areas.
• Resilience to Property Cooling Measures: Unlike traditional property developers, CSC's trade centres are not significantly affected by China's property-cooling measures and are expected to benefit from urbanisation.
• Sales and Earnings: Forecasted net profit growth of 31–42% YoY for FY15–17. The company expects strong sales from Zhengzhou and Hefei in FY15, and a new contribution from Chongqing in FY16.
• Earnings Drivers: EBIT contributions from e-commerce and logistics are expected to increase from 3% and 1% in FY15 to 4% and 3% in FY17.
• Valuation: The stock is trading at a 56% discount to its end-FY14 property NAV (HKD8.1) and a 44% discount to the SOTP value. The FY16E PER is 5.5x, significantly below the average forward PER of 8.8x since January 2014.
• Catalysts: The rollout of LIEP in additional cities and the growth of e-commerce platforms are expected to boost investor sentiment and the share price.

Key Information

Financial Highlights (FY15E–FY17E)

Valuation Metrics

• Discount to Property NAV: 56% (end-FY14)
• Discount to SOTP: 44%
• Average Forward PER since 2014: 8.8x
• Current FY16E PER: 5.5x
• Target Price (HKD): 6.30
• Upside from 22 Sep Price (HKD): 78.5%

Share Price Performance

• 12-month range (HKD): 1.82–4.73
• Market Cap (USD bn): 3.53
• 3m Avg Daily Turnover (USDm): 16.58
• Shares Outstanding (m): 7,759
• Major Shareholder: Cheng Chung Hing (35.4%)

Risks

• Slower-than-expected sales for logistics and residential property segments.

Investment Case

• Buy (Initiation): CSC is undervalued and offers a unique business model compared to traditional property developers.
• Differentiated Business Model: Unlike most developers, CSC retains a large portion of the GFA for logistics and commercial use, leading to a more diversified and recurring revenue model.
• Strategic Partnership with Tencent: This collaboration enhances the company's e-commerce and logistics capabilities, offering a new O2O platform and improving customer relationship management (CRM) functionality.

Earnings Revisions

• Bloomberg-Consensus EPS for FY15–16 have been revised down by 11–14% due to share dilution from Tencent's investment.
• Daiwa's EPS Forecast for FY17E is 9% higher than the consensus, reflecting optimism about property sales and the development of e-commerce and logistics initiatives.

Company Background

• Focus: Providing integrated logistics and trade solutions for SMEs.
• Core Business: Third-generation trade centres with logistics and warehousing facilities.
• New Initiatives: Developing a fourth-generation trade centre model that integrates online and offline platforms.

Summary of Business Model

• Sales-Plus-Operation Model: CSC sells around 50% of GFA and leases the rest, using sales proceeds to fund new projects.
• Residential Property Sales: Account for 20% of GFA, with the rest retained for logistics and commercial use.
• Recurring Income: The company retains a large proportion of the GFA, leading to a 55% ownership in each project, providing a more stable and diversified revenue stream.

Strategic Initiatives

• Huasheng Outlets-Weixin Mall (Aolaigo.com): A new O2O platform launched in 2014, combining physical trade centres with Tencent's Weixin platform.
• CSC86.com: An existing platform used for promoting SME products, offering technical support and website management services.
• Future Plans: Leveraging Tencent's expertise to integrate B2B and B2C platforms with physical trade centres, enhancing CRM capabilities and offering value-added services.

Conclusion

CSC's unique business model, combined with its strategic collaboration with Tencent and the development of new e-commerce and logistics platforms, positions it as a promising investment. The company is undervalued, with a strong growth outlook and potential for improved profitability through its diversified revenue streams.