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Summary of DBS Group Research: Equity Analysis (13 August 2015)

Core Content

This document provides an equity research analysis focusing on the impact of RMB depreciation on the financial performance and valuation of Chinese property developers, with a particular emphasis on COLI and CR Land. It also includes a broader overview of the sector and the performance of other listed companies.

Main Points

RMB Depreciation Impact

• Earnings Growth: Developers' FY15 core earnings growth is expected to slow from 17% to 10% on average due to a 5% RMB depreciation.
• Valuation: Despite the depreciation, the sector's valuation remains attractive. COLI and CR Land have priced in approximately 9% RMB depreciation, making them potentially oversold.
• Forex Impact: Financial impacts from exchange rate risk are not as high as expected. The forex loss may only affect book values by about 2% on average for RMB-reporting companies.
• Refinancing: High-quality names can still refinance overseas debt, which helps mitigate the impact of RMB depreciation on their balance sheets.

Key Financial Metrics

• Debt Structure: Companies with USD/HKD debt as a significant portion of total debt include COLI (83%), COGO (74%), and CR Land (70%).
• Corporate Bond Issuance: Several developers have issued bonds with attractive coupon rates, including China South City (7.00%), Beijing Capital (4.58%), Evergrande (5.38%), and Longfor (4.60%).

Valuation Analysis

• PE Ratios: The sector is trading at a 6.8×6.1× FY15/FY16F PE. After factoring in 5% RMB depreciation, the valuation is expected to rise to 7.2×6.4×, which is still not demanding.
• Earnings Impact: COLI and CR Land are expected to see earnings declines of 4.8%–4.9% and 4.4%–4.5% respectively due to RMB depreciation.
• Share Price Correction: With a >8% correction in share prices, the current levels are seen as good entry points.

Key Companies and Their Analysis

COLI and CR Land

• Target Price: COLI at HK$23.15, CR Land at HK$19.78.
• Recommendation: Both are recommended as "Buy".
• Market Cap: COLI at HK$228.3bn, CR Land at HK$137.1bn.
• FY15F PE: COLI at 7×, CR Land at 11×.

Other Companies

• China Vanke 'H': Target price HK$18.50, market cap HK$204.2bn, FY15F PE at 6×.
• Evergrande: Target price HK$4.93, market cap HK$77.2bn, FY15F PE at 7.9×.
• Longfor: Target price HK$10.62, market cap HK$61.9bn, FY15F PE at 6.6×.
• Shimao Property: Target price HK$13.04, market cap HK$45.3bn, FY15F PE at 4.8×.
• China South City: Target price HK$2.36, market cap HK$18.9bn, FY15F PE at 8.8×.
• COGO: Target price HK$3.09, market cap HK$7.1bn, FY15F PE at 3.0×.
• Franshion: Target price HK$2.41, market cap HK$25.7bn, FY15F PE at 6.5×.
• Greentown: Target price HK$7.61, market cap HK$16.5bn, FY15F PE at 4.1×.
• Guangzhou R&F: Target price HK$7.65, market cap HK$24.7bn, FY15F PE at 3.4×.
• Sino-Ocean Land: Target price HK$4.82, market cap HK$36.3bn, FY15F PE at 8.2×.

Valuation Comparison and Historical PE Trends

• PE Valuations: Historical PE trends show that the sector has experienced significant fluctuations between troughs and peaks, but current valuations are still considered reasonable.
• Average PE: The average PE for FY15 is 7.9×, and for FY16 is 7.0×.
• Discount to NAV: The sector is trading at a simple average discount to NAV of 33%.

Analysts

• Carol WU: (852) 2863 8841 | carol_wu@hk.dbsvickers.com
• Danielle WANG, CFA: (852) 2820 4915 | danielle_wang@hk.dbsvickers.com
• Ken HE, CFA: (86) 21 6888 3375 | ken—he@hk.dbsvickers.com
• Andy YEE, CFA: (852) 2971 1773 | andy_yee@hk.dbsvickers.com

Conclusion

The analysis suggests that despite the impact of RMB depreciation, the sector remains attractively valued. COLI and CR Land are highlighted as potentially oversold with good entry points, given their ability to refinance debt and the possibility of strong interim results and sales outlook. The overall market is viewed as a good opportunity for investment.