20171208-中国银河国际证券-华南城-01668.HK-Everybody_Has_His_Turn_16页_1mb

China South City (1668.HK) Summary

Core Content

China South City (CSC) is a specialized property developer that collaborates with local governments to construct large-scale integrated trade centres, which include residential areas, logistics and warehousing facilities, shopping centres, and other services. The Company has a substantial land bank of over 76 million square meters, which has been acquired at low costs (RMB300-500 per square meter). This land bank is a key asset, providing a long-term development base and contributing to the Company's valuation and growth prospects.

CSC's property pre-sales have increased by 22% YoY, and the Company is projected to reach HK$11bn in contracted sales. Its core earnings from property development and rental income are expected to grow, with a gross margin of 40%. The Company's share price is currently at HK$1.92, with a target price of HK$2.80 (+46%), based on a 45% discount to its SOTP valuation and a comparison with peers.

Main Points

• Business Model: CSC specializes in large-scale integrated trade centres, which include residential, logistics, and retail components. It benefits from government support and has a low-cost land bank in key hub cities.
• Revenue Growth: Property development and rental income are the main contributors to revenue and profit. Property sales account for 80% of revenue and 75% of operating segment profit.
• Valuation: The Company's share price is at 0.6x P/B, which is below its historical range. Its SOTP valuation is HK$5.1 per share, suggesting undervaluation.
• Strategic Shift: CSC is adopting a more flexible strategy by acquiring smaller land parcels in city centres and built-up areas, which can shorten the payback period for projects.
• Earnings Drivers: Fair value gains from its investment properties contribute significantly to reported profits, with up to 55% of profits coming from these gains.
• Risk Factors: The Company faces risks such as high gearing, dependency on government support, RMB depreciation, and potential delays in project completion.

Key Information

Financial Highlights

• Revenue: Increased from HK$9,758m in 2015 to HK$7,839m in 2017, with projected growth to HK$9,060m in 2018E and HK$9,879m in 2019E.
• Net Profit: Rose from HK$3,715m in 2016 to HK$4,323m in 2017, with a decline in 2018E and 2019E due to fair value gains and other expenses.
• Core Net Profit: Increased from HK$1,351m in 2017 to HK$1,738m in 2019E, showing a consistent growth trend.
• EPS: Varied from HK$0.54 in 2017 to HK$0.22 in 2019E, reflecting the impact of fair value gains and other expenses.
• PER: Ranged from 4.3x in 2016 to 8.7x in 2019E.
• PBR: Stood at 0.54x in 2017 and is expected to decline further to 0.49x in 2019E.

SOTP Valuation

• Investment Properties: Carrying value of HK$42.2bn, translating to an SOTP value of HK$46.5bn or HK$5.81 per share.
• Properties for Sale: Estimated value of HK$13.8bn or HK$1.72 per share.
• Property Management and Other Operations: Combined value of HK$7bn or HK$0.90 per share.
• Net Debt: HK$23.6bn, resulting in a discounted SOTP valuation of HK$5.1 per share.

Project Breakdown

• Total Planned GFA: 81.8 million square meters across eight projects.
• Land Cost: Ranges from RMB279 to RMB744 per square meter.
• Development Status: Approximately 17% of the land bank has been developed, with the rest planned for future use.
• GFA Allocation: 50% for trade malls, 20% for residential, 15% for logistics, and the rest for other services.

Other Business Streams

• Property Management: Revenue increased by 62% YoY to HK$247m in 1H FY18.
• Logistics and Warehousing: Supports tenants and provides real-time scheduling information.
• E-Commerce: Operates an O2O platform and has a JV with Weixin for payment services.
• Factory Discount Outlets: Revenue exceeded RMB610m in 1H17, with a GFA of 393,000 sqm and 700 brands.

Shareholding Structure

• CHENG Chung Hing: Largest shareholder with a 28% effective stake, and has increased holdings by 375m shares YTD.
• Tencent Group: Holds 11.6% stake, acquired in 2014 for HK$1.5bn.
• Chen's International Investment: Reduced stake from 12.5% to below 5% by end-June 2017.
• SONG Chuan: New CEO with extensive experience in property development and urban operations.

Risks

• Earnings Volatility: Reliance on a few major projects and fair value gains.
• Execution Risks: Dependence on tenant demand and government support.
• E-Commerce Impact: Potential decline in B2B and B2C business due to online migration.
• Interest Rate Risks: Total borrowings exceed HK$32bn, with potential impact on net profit.
• Currency Exposure: RMB depreciation may affect translation and financing costs.

Conclusion

CSC offers an attractive valuation compared to its peers and has a unique business model that leverages its large low-cost land bank and strong government relationships. The Company's focus on property development and rental income, along with its expansion into e-commerce and other services, positions it well for future growth. However, it faces significant risks, including high gearing, dependency on government support, and the impact of RMB depreciation. The Company's strategic shift towards more flexible land acquisition and improved execution is expected to enhance its performance and reduce risks.