KWG Property Holding Summary
Core Content
KWG Property Holding, a property developer with a focus on mid to high-end residential projects, grade-A office buildings, international brand hotels, and shopping malls, has seen its share price surge by 50% since a previous report. However, the company's performance in FY17 was disappointing, leading to a downgrade from Buy to Neutral.
Main Points
FY17 Performance
- Recurring Net Profit: Down 7% YoY, missing both the forecast and consensus estimates by 30% and 24% respectively.
- DPS: Declined 20% YoY, missing the forecast and consensus estimates by 13% and 22% respectively.
- Revenue Growth: 30% YoY, which was 14% and 10% below the forecast and consensus estimates.
- GPM: 34.8%, slightly lower than the previous year's 34.6% but ahead of the forecast of 36%.
- Recurring NPM: 31.4%, down from 39.1% in FY16, but ahead of the forecast of 29.2%.
FY18F Expectations
- Sales Target: CNY65bn (+71% YoY), with saleable resources of CNY110bn.
- Contracted Sales Growth: Strong momentum, with 2M18 contracted sales up 143% YoY compared to 20% YoY in 2M17.
- NPMs: Expected to remain resilient at 23–25% due to high GPM (30–33%) and economies of scale.
- Earnings Growth: Anticipated to grow at a CAGR of 33.7% during FY17–20F, with a rebound of 49.4% YoY in FY18F.
Valuation and TP
- Target Price (TP): HKD10.00 (up from HKD8.80), based on a 55% discount to the end-FY18F ENAV of HKD22.30.
- Share Price: HKD11.10, currently trading at a 50% discount to NAV.
- P/B (Price to Book Value): 0.88 in FY18F, indicating a discount to book value.
- Dividend Yield: Expected to increase to 9.0% by FY20F.
Financial Position
- Net Debt to Equity: Projected to decrease to 42.7% by FY20F, showing improvement in leverage.
- SG&A as % of Sales: Expected to be contained at 4.5–4.7% over FY18F–20F, down from 5.8% and 4.8% in FY16–17F.
- ROE and ROA: Expected to improve over FY18F–20F, with ROE at 13.6% and ROA at 2.9% in FY18F.
Key Information
Share Data
- Avg Daily Turnover: HKD198m / USD25.0m
- 52-wk Price Range: HKD5.22 - HKD13.5
- Free Float: 38%
- Shares Outstanding (m): 3,155
- Estimated Return: -10%
Shareholders
Share Performance
- Absolute Return (YTD): 21.4%
- Relative Return (YTD): 19.3%
- 1m: -5.5% / -2.5%
- 3m: 26.2% / 22.9%
- 6m: 38.7% / 27.7%
- 12m: 80.8% / 55.4%
Key Drivers
- High GPM: 30–33%
- Heavy Exposure to Tier-1 & Tier-2 Cities: Strong landbank in these areas.
Key Risks
- Slower Revenue Booking
- Rising Land Costs
Financial Exhibits
Forecasts and Valuations
| Metrics |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Total Turnover (CNYm) |
8,865 |
11,543 |
16,297 |
22,754 |
27,220 |
| Reported Net Profit (CNYm) |
3,465 |
3,620 |
4,058 |
5,400 |
6,491 |
| Recurring Net Profit (CNYm) |
2,922 |
2,716 |
4,058 |
5,400 |
6,491 |
| Recurring Net Profit Growth (%) |
12.6 |
-7.0 |
49.4 |
33.1 |
20.2 |
| Recurring EPS (CNY) |
0.97 |
0.88 |
1.29 |
1.69 |
2.00 |
| DPS (CNY) |
0.52 |
0.41 |
0.52 |
0.68 |
0.80 |
| Recurring P/E (x) |
9.2 |
10.2 |
6.9 |
5.3 |
4.5 |
| P/B (x) |
1.13 |
1.00 |
0.88 |
0.75 |
0.64 |
| Dividend Yield (%) |
5.8 |
4.6 |
5.8 |
7.6 |
9.0 |
| Return on Average Equity (%) |
15.0 |
14.0 |
13.6 |
15.4 |
15.7 |
| Return on Average Assets (%) |
3.6 |
2.9 |
2.9 |
3.5 |
3.6 |
| Net Debt to Equity (%) |
66.8 |
67.9 |
54.0 |
51.2 |
42.7 |
Income Statement
| Metrics |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Total Turnover |
8,865 |
11,543 |
16,297 |
22,754 |
27,220 |
| Gross Profit |
3,070 |
4,020 |
5,512 |
6,971 |
8,020 |
| EBITDA |
2,019 |
2,251 |
3,291 |
4,326 |
5,148 |
| Depreciation and Amortisation |
203 |
208 |
214 |
221 |
230 |
| Operating Profit |
2,222 |
2,458 |
3,505 |
4,548 |
5,379 |
| Net Interest |
10 |
-6 |
-51 |
-120 |
-157 |
| Income from Associates & JVs |
2,130 |
1,898 |
2,680 |
3,743 |
4,478 |
| Exceptional Income - Net |
166 |
1,205 |
0 |
0 |
0 |
| Pre-Tax Profit |
4,527 |
5,555 |
6,135 |
8,171 |
9,699 |
| Taxation |
-1,066 |
-1,950 |
-2,096 |
-2,796 |
-3,241 |
| Minority Interests |
3 |
15 |
20 |
25 |
33 |
| Recurring Net Profit |
2,922 |
2,716 |
4,058 |
5,400 |
6,491 |
Cash Flow
| Metrics |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Change in Working Capital |
581 |
14,601 |
4,268 |
3,013 |
6,413 |
| Cash Flow from Operations |
-1,109 |
12,172 |
2,094 |
418 |
3,342 |
| Capex |
-292 |
-322 |
-354 |
-389 |
-428 |
| Cash Flow from Investing Activities |
2,539 |
-14,155 |
1,095 |
-389 |
-428 |
| Dividends Paid |
-1,557 |
-1,283 |
-1,623 |
-2,160 |
-2,596 |
| Cash at Beginning of Period |
10,946 |
25,771 |
39,199 |
40,107 |
46,824 |
| Net Change in Cash |
14,824 |
13,428 |
908 |
6,717 |
10,493 |
| Ending Balance Cash |
25,771 |
39,199 |
40,107 |
46,824 |
57,317 |
Balance Sheet
| Metrics |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Total Cash and Equivalents |
26,902 |
40,467 |
41,375 |
48,092 |
58,585 |
| Tangible Fixed Assets |
4,931 |
5,246 |
5,096 |
5,257 |
5,446 |
| Total Investments |
29,531 |
46,550 |
47,566 |
50,657 |
54,337 |
| Total Other Assets |
1,333 |
1,411 |
1,411 |
1,411 |
1,411 |
| Total Assets |
110,742 |
134,945 |
144,633 |
166,046 |
194,508 |
| Short-Term Debt |
4,754 |
3,741 |
8,848 |
10,175 |
11,702 |
| Total Long-Term Debt |
38,196 |
55,905 |
50,139 |
57,660 |
66,309 |
| Other Liabilities |
2 |
2 |
2 |
2 |
2 |
| Total Liabilities |
86,733 |
106,699 |
111,988 |
127,462 |
148,995 |
| Shareholders' Equity |
23,950 |
27,607 |
32,007 |
37,945 |
44,874 |
| Minority Interests |
58 |
638 |
638 |
638 |
638 |
| Total Equity |
24,009 |
28,246 |
32,645 |
38,583 |
45,513 |
| Net Debt |
16,048 |
19,178 |
17,613 |
19,744 |
19,426 |
| Total Liabilities & Equity |
110,742 |
134,945 |
144,633 |
166,046 |
194,508 |
Key Metrics
| Metrics |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Revenue Growth (%) |
6.3 |
30.2 |
41.2 |
39.6 |
19.6 |
| Recurrent EPS Growth (%) |
10.6 |
-9.3 |
47.2 |
31.1 |
18.4 |
| Gross Margin (%) |
34.6 |
34.8 |
33.8 |
30.6 |
29.5 |
| Operating EBITDA Margin (%) |
22.8 |
19.5 |
20.2 |
19.0 |
18.9 |
| Net Profit Margin (%) |
39.1 |
31.4 |
24.9 |
23.7 |
23.8 |
| Dividend Payout Ratio (%) |
45.0 |
35.5 |
40.0 |
40.0 |
40.0 |
| Capex/Sales (%) |
3.3 |
2.8 |
2.2 |
1.7 |
1.6 |
| Interest Cover (x) |
13.9 |
7.5 |
9.4 |
10.1 |
9.9 |
Valuation and Recommendation
- Valuation Basis: 55% discount to end-FY18F ENAV of HKD22.30.
- Recommendation: Downgrade to NEUTRAL from Buy, due to the disappointment in FY17 results and the need for more clarity on earnings growth.
- Upside Risk: Faster-than-expected recovery in contracted sales growth.
- Downside Risk: Further tightening policies in tier-1 & tier-2 cities.
Peer Comparison
| Company |
Stock Code |
Price (HKD) |
Mkt Cap (USDm) |
3-mth Avg T/O (USDm) |
RHB/Cons (USDm) |
Discount (%) |
P/E (FY17F) |
P/E (FY18F) |
EPS YoY (FY17F) |
EPS YoY (FY18F) |
3-yr EPS CAGR |
P/BV (FY17F) |
P/BV (FY18F) |
Div Yield (FY17F) |
Div Yield (FY18F) |
| Large Peer Average |
- |
- |
- |
- |
- |
25.9 |
27.9 |
9.0 |
6.8 |
52.3 |
30.7 |
2.0 |
1.6 |
4.8 |
5.4 |
| Evergrande |
3333 HK |
25.20 |
42,314 |
74.0 |
42.20 |
40.3 |
13.3 |
6.7 |
5.9 |
96.6 |
15.0 |
2.2 |
1.9 |
9.2 |
8.1 |
| China Overseas |
688 HK |
27.10 |
37,841 |
90.8 |
43.00 |
37.0 |
7.3 |
7.2 |
8.2 |
6.1 |
1.6 |
2.2 |
1.9 |
3.7 |
4.3 |
| China Vanke |
2202 HK |
32.40 |
52,398 |
49.8 |
33.34 |
2.8 |
13.6 |
10.4 |
8.4 |
23.9 |
2.2 |
1.9 |
3.9 |
4.5 |
4.9 |
| Country Garden |
2007 HK |
16.10 |
44,609 |
175.0 |
25.80 |
37.6 |
11.1 |
8.2 |
34.7 |
34.1 |
2.3 |
1.8 |
4.1 |
5.4 |
|
| CR Land |
1109 HK |
29.05 |
25,661 |
76.0 |
42.00 |
30.8 |
10.5 |
8.3 |
26.5 |
17.6 |
1.3 |
1.1 |
4.1 |
4.8 |
|
| Longfor |
960 HK |
23.60 |
17,793 |
19.9 |
35.10 |
32.8 |
11.2 |
8.8 |
27.6 |
24.9 |
1.4 |
1.2 |
4.5 |
5.6 |
|
| Sunac |
1918 HK |
30.15 |
16,906 |
117.1 |
37.30 |
19.2 |
57.7 |
17.4 |
231.5 |
2.3 |
1.8 |
4.1 |
5.4 |
|
|
Conclusion
KWG Property Holding's FY17 results were below expectations, leading to a downgrade to NEUTRAL. The company's contracted sales are expected to grow significantly in FY18F, which should support its long-term earnings growth. However, the short-term re-rating story may have ended, and the stock is currently trading at a 50% discount to NAV. The new target price of HKD10.00 is based on a 55% discount to the end-FY18F ENAV of HKD22.30. The upside risk is faster-than-expected sales growth, while the downside risk is policy tightening in key cities.
