20130826-Maybank_KERPL-China_Resources_Land_Margin_Miss__Growth_Profile_Largely_Intact_11页_297kb

China Resources Land (CRL) Summary

Core Content

China Resources Land (CRL), a state-owned enterprise (SOE)-backed national property developer, reported its interim 2013 results. The company has a substantial investment property portfolio, including hotels, office buildings, and mixed-use developments such as "MIXc" and "Rainbow City" malls. It has been listed in Hong Kong since 1996 and is majority-owned by China Resources Holdings. CRL operates in a range of residential segments, from mid-end to high-end.

Key Financials

• Share Price: HKD22.30
• Target Price: HKD23.40
• Shares Issued (m): 5,829.3
• Market Cap (USD b): 16.8
• 3-mth Avg Daily Turnover (USD m): 29.1
• HSI: 21,863.51
• Free Float (%): 32.0
• Major Shareholders: China Resources Holdings (68.0%)

Performance Highlights

• Core Profit (1H13): HKD2.008b, in line with Bloomberg consensus estimate (HKD1.976b), up 49% YoY and representing ~21% of full-year consensus net profit.
• Core Profit Margin (1H13): 12.7%, lower than expected.
• GPM (1H13): 31.4%, which was 4ppt below the pre-result consensus of 35.8%.
• Full-Year GPM Estimate: 16.5%, expected to improve to 33.9% in 2015.
• Underlying Net Profit Growth (2013-2015): 20.1%, 22.1%, 25.5% YoY respectively.
• Net Gearing (%): 42.6% (Jun-13), down from 44.8% (Dec-12).
• ROE (%): 15.2% (2015F), showing improvement over time.
• BVPS: 16.03 (2015F), indicating a growing book value per share.
• DPS: 0.65 (2015F), showing a steady dividend growth.

Operational and Strategic Insights

• New City Expansion: CRL faced challenges in entering new cities, with Phase 1 projects contributing to a lower GPM. Management plans to slow down expansion in Tier 3 and 4 cities and focus on new provincial capitals.
• 2015 Contract Sales Target: CRL aims to achieve CNY100b in contract sales by 2015.
• Qianhai Acquisition: The acquisition includes a project partner who will take an equity stake and buy back the hotel portion, which is expected to be the least profitable. The original land cost is seen as too high.
• Saleable Resources (2013): ~CNY95b, with ~CNY60b in 1H13 and ~CNY61.2b in 2H13.
• New Launches: CRL plans to have 10 new launches in 2013, with 6 already completed.

Balance Sheet and Cash Flow

• Net Debt to Attributable Equity Ratio: 42.6% (Jun-13), in line with expectations.
• Net Debt to Total Equity Ratio: 38.2% (Jun-13), also in line with expectations.
• Cash Flow Guidance (2013):
  • Inflows:
    • Cash from contract sales: CNY30.5b (1H13), expected to reach CNY59.0b for the full year.
    • Cash from rental: CNY2.26b (1H13), expected to be CNY4.57b for the full year.
  • Outflows:
    • Construction costs: CNY14.0b (1H13), expected to reach CNY30.5b for the full year.
    • Land premium payment: CNY4.9b (1H13), expected to reach CNY13.3b for the full year.
• Net Income (1H13): HKD4,384m, up 20% YoY.
• Interim DPS: HK7.3 cents, up 16% YoY.

Valuation and Investment Outlook

• Current Share Price: HKD22.30, trading at a 14% discount to the estimated NAV of HKD26.0.
• Target Price (TP): HKD23.40, a 10% discount to NAV.
• PE Ratio (2014): 12x, suggesting fully valued.
• PB Ratio (2014): 1.6x, also indicating fully valued.
• Maintain HOLD: The company's fundamentals remain strong, and its growth profile is largely intact.

Risks and Outlook

• Upside Risks: Faster-than-expected margin recovery, stronger execution, and unexpected loosening of property regulations.
• Downside Risks: Slower-than-expected sales growth, higher-than-expected costs, and regulatory tightening.

Summary Table

Conclusion

CRL's performance in the first half of 2013 showed a margin miss due to new projects in Phase 1, but its strong volume growth and cost control helped maintain earnings in line with expectations. The company remains focused on expanding into new provincial capitals while slowing down in lower-tier cities. The Qianhai acquisition is viewed positively, with the hotel portion being expected to be bought back. CRL is on track to achieve its 2015 contract sales target of CNY100b, and its valuation is considered fully justified. The stock is recommended to be held, with a target price reflecting a 10% discount to NAV.