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Sino-Ocean Land (3377 HK) Analysis Summary

Core Content and Key Information

Company Overview

• Industry: Financials, Real Estate Holding & Development
• Principal Business: China property development
• Price Target: HK$5.11 (12-Month)
• Previous Price Target: HK$5.26
• Recommendation: HOLD
• Current Price: HK$4.61
• HSI: 22,518

Financial Highlights (1H13)

• Sales: Rmb9,098m (+35% y-o-y)
• Property Development Revenue: Rmb7,780m (+36% y-o-y)
• Property Investment Revenue: Rmb251m (+26% y-o-y)
• Property Management Revenue: Rmb232m (+6% y-o-y)
• Others: Rmb835m (+32% y-o-y)
• Cost of Goods Sold: Rmb6,910m (+47% y-o-y)
• Gross Profit: Rmb2,187m (+6% y-o-y)
• SG&A: Rmb437m (-10% y-o-y)
• Operating Profit: Rmb1,751m (+11% y-o-y)
• Net Profit (after distribution): Rmb1,065m (+25% y-o-y)
• Core Net Profit: Rmb917m (+13% y-o-y)
• EPS (HK$): 0.69 (+20% y-o-y)
• Core EPS (HK$): 0.70 (+18% y-o-y)
• DPS (HK$): 0.07 (+17% y-o-y)
• Net Debt/Equity: 0.5 (end of FY13)
• Net Gearing: 54% (end of 1H13)
• Cash on Hand: Rmb13.115bn (-19% from end of 1H12)
• Unbooked Sales: Rmb45bn (as of end of 1H13)

Operational Insights

• Landbank: 22.3m sm (end of 1H13), with 76% in Tier I/II cities
• GFA Completion: 870k sm in 1H13 (+59% y-o-y)
• Contracted Sales: Rmb17.813bn (+30% y-o-y), representing 51% of full year target
• GFA Contracted: 1,336k sm (+10% y-o-y)
• ASP Contracted: Rmb13.3k/sm (+18% y-o-y)

Financial Outlook

• Residential Sales Growth: Expected to remain stable at double-digit over the next five years
• Rental Income Growth: Expected to grow faster than residential sales, becoming a mid-to-long-term revenue driver
• Commercial Segment: Expected to grow rapidly; aims to add one JV project every 2-3 years
• Commercial Property GFA Target: 300k sm per year for the next five years
• Rental Income Estimate: Rmb764m in FY13F, Rmb1,339m in FY14F
• NAV Estimate: HK$10.21 (adjusted down)
• Potential Catalyst: More NAV-accretive acquisitions

Valuation Metrics

• PE (FY14F): 6.6x (vs. sector average of 6.2x)
• EV/EBITDA (FY14F): 6.5x
• P/Book Value (FY14F): 0.6x
• Net Debt/Equity (FY14F): 0.5x
• NAV Discount: 55% (current)
• Sector Average NAV Discount: 49%
• Tier 2 Players Average NAV Discount: 45%

Analyst Comments

• Maintain HOLD: Due to lack of near-term catalysts
• EPS Estimate Adjustment: FY13F/14F core earnings cut by 5% each
• GPM Adjustment: From 27% to 25%
• SG&A as % of Revenues: Reduced to 7.5% in FY13 from 8.5% in FY12
• Dividend Repurchase: US$813m repurchased since late June, with potential for another US$87m
• Projected Savings: Rmb225m in FY13, Rmb449m in FY14

Key Points

Revenue Growth

• Sino-Ocean Land reported strong revenue growth in 1H13, with a 35% year-on-year increase in sales
• Property development revenue grew by 36%, driven by higher GFA delivery and a modest decline in ASP
• Contracted sales reached Rmb17.813bn, locking in 51% of the full year target

Cost Management

• COGS rose by 47%, primarily due to increased land costs
• SG&A expenses decreased to 2% of presales, down from 4% in 1H12
• Management aims to reduce SG&A and interest expenses to 7.5% of revenues in FY13

Financial Position

• Net gearing increased to 54% at end of 1H13, up from 42% a year ago
• Management expects net gearing to rise to 62% by end of FY13, potentially higher if land purchases occur
• Cash on hand decreased to Rmb13.115bn due to PCS buybacks, but total available funds remain at Rmb41bn

Investment Strategy

• Management continues to focus on Tier I cities for land acquisitions
• Plans to diversify asset classes, including commercial properties and self-branded malls ("We-Life")
• Co-developing with Swire Properties on a commercial complex

Valuation and Market Performance

• Current valuations are considered fair with a 55% NAV discount and 6.6x FY14F PE
• The stock has underperformed the sector by 15.5% YTD, but some recovery has been seen
• Compared to Tier 2 players, the stock is slightly more discounted but has similar PE ratios

Key Risks and Opportunities

• Risks: Uncertainty in Tier III cities, potential increase in net gearing
• Opportunities: Expansion of commercial segment, potential for NAV accretion through acquisitions

Conclusion

Sino-Ocean Land's 1H13 results show strong revenue growth, supported by increased GFA delivery and contracted sales. The company is actively diversifying its asset base, with a focus on commercial properties and self-branded malls. While the stock has underperformed the sector, current valuations are deemed fair. The analysts maintain a HOLD recommendation due to the lack of near-term catalysts and the potential for increased net gearing. The company is expected to continue its strategy of improving cost control and optimizing its landbank portfolio.