lvgem (china) real estate investment cmbc securities ... · cities, urban renewal plays an...

16 April, 2013

Research ● Company Report 29 June 2020

LVGEM (China) Real Estate Investment Company Limited (0095 HK, BUY) A Veteran Real Estate Enterprise in Urban Renewal Field. Started as a construction company, LVGEM (China) Real Estate Investment Company Limited (“the Company”) has transformed to a real estate enterprise that garners extensive experience in urban renewal field. The Company adhered to its

“dual-core” strategy (focusing on core cities and cities’core areas) whereby it

has accumulated more than 20 years of experience in project development in Guangdong-Hong Kong-Macao Greater Bay Area, such as Shenzhen, Hong Kong, Zhuhai and Dongguan. The Company has adopted the two-way expansion model, which mainly comprises of urban renewal and, to a lesser extent, market auction, in order to garner cost advantages over land auctions and obtain quality and highly profitable land reserve. Favorable Asset Injection Strategy. The Company has been working in collaboration with the controlling shareholder (Mr. Wong Hong King), who integrates land resources for project incubation and primary development, and injects the projects to the Company when the time is ripe. This arrangement allows the Company to acquire high-quality land reserves without the need of lengthy timing for development at competitive price. There remains plenty of projects in the asset injection pipeline as the controlling shareholder boasted urban renewal projects with a total GFA of 10 million m2, which represents 2.2x of the Company’s land reserves of about 4.5 million m2 as at FY19-end.

Strong Recurrent Income Base. By owning and operating high-quality commercial properties at supreme locations, the Company sustains stable recurring income and cash flow that lays a solid foundation to support the Company’s future growth. Moreover, the Company is poised to enjoy lucrative capital gain from the quality assets. Elsewhere, the Company also derives supplemental income from property management and hotel operations. The Company provides comprehensive property management services for most of its real estate development projects. In respect of hotel operations, the Company operates and manages two hotels which are located in Shenzhen and the United States.

Initiate with a Buy Rating. We initiate our coverage on the Company with a Buy rating. We believe the stock offers a unique opportunity to invest in the urban renewal field with plenty of quality properties in the asset injection pipeline. We use sum-of-the-parts valuation to value the Company. Our assessed fully diluted NAV for the Company comes in at RMB25,207mn. Our assessed fully diluted per share NAV (accounting for the dilutive convertible preference shares and convertible bonds) arrives at HK$3.10/share.

CMBC Securities Company Limited – Research Department

Cho Fook Tat

852-3728 8133

[email protected]

Earnings Summary

Year Ended Dec 31 2017 2018 2019 2020F 2021F

Recurring net profit (RMB mn) 649.8 765.3 1,102.6 1,257.2 1,403.5 Price (as of 26 Jun.) HK$2.40

Change (%) 8 18 44 14 12 Target price HK$3.10

Recurring EPS (RMB cents) 13.8 15.6 22.1 24.9 27.8 Market cap. HK$12,155mn

Change (%) 8 13 42 12 12 Major shareholders: Mr. WONG Hong King (70.6%)

DPS (HK cents) 5.0 5.3 6.1 6.8 7.5 China Vanke (5.9%)

P/E (x) 15.8 14.1 9.9 8.8 7.9 Toplist Investments (5.9%)

Dividend yield (%) 2.1 2.2 2.5 2.8 3.1

Source: Company data, CMBC Securities Research

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Company Report

Contents

1. A Veteran Real Estate Enterprise in Urban Renewal Field…..…………………….……….……….1

2. The Reverse Takeover in 2015 Kicked Start the Listco’s Growth Momentum…………..……....1

3. A Vote of Confidence by industry leader China Vanke……..…………….……………………........2

4. A Rational Property Market is Beneficial for the Developers …….………………………….........3

5. Real Estate Development is the Core Business of the Company……………………...................3

6. Decent Profitability amid Low Land Acquisition Cost……………………………………...............4

7. Favorable Asset Injection Strategy………………………………………..........................................7

8. Stable Recurring Income from Commercial Properties Operation……………..…….……..…….7

9. Quality Supplemental Income from Propetty Management and Hotel Operations……….........9

10. Earnings Forecasts………………..…………….…………………….…………………,..….............10

11. Valuation and Risks……………………………………………………….………………………........11

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1

A Veteran Real Estate Enterprise in Urban Renewal Field Started as a construction company, the Company has transformed to a real estate enterprise which garners extensive experience in land acquisition and development. Capitalizing on its over 20 years of extensive experience accumulated in urban renewal field, the Company has developed plenty of quality projects and become one of the experienced players in the urban renewal space.

The Company adopts a “dual-core” strategy (focusing on core cities and cities’core

areas) whereby it has accumulated more than 20 years of experience in project development in Guangdong-Hong Kong-Macao Greater Bay Area, such as Shenzhen, Hong Kong, Zhuhai and Dongguan. In terms of land acquisition, the Company deploys two-way expansion model whereby land resources are mainly acquired via urban renewal and, to a lesser extent, market auction, in order to garner cost advantages over land auctions and obtain quality and highly profitable land reserve. By maintaining high-quality and profitable land reserve resources and owning and operating commercial properties at supreme locations, the Company has generated stable cash flow and laid a solid foundation for the Company’s future growth. Besides, the Company derives supplemental income from property management services for most of its real estate development projects as well as engages in hotel operations.

The Reverse Takeover in 2015 Kicked Start the Listco’s Growth Momentum The Company completed a reverse takeover on 30 November 2015, whereby it purchased the entire shareholding of Green View Holding Company Limited (“Green View”) from its major shareholder (Mr. Wong Hong King) for a consideration of HK$13,785 million, which was settled by the issuance of 2,509 mn consideration shares at HK$2.06 per share; HK$7,031mn by the allotment of 3,413mn convertible preference shares (which may be converted to ordinary shares on 1:1 basis); and HK$1,584mn by cash. Green View was an investment holding company and was principally engaged in the development of urban boutique residences, community-based lifestyle and shopping centers and urban complexes in Shenzhen and the Pearl River Delta. As the acquisition was being carried out within 24 months of Mr. Wong gaining control of the Company, the Green View Acquisition constituted a reverse takeover and deemed new listing of the Company. Since the controlling shareholder injected land resources into listed companies in 2015, the Company’s profitability has been significantly enhanced as it enjoyed compound annual growth of 55% and 43% in revenue and net profit during FY15-19, respectively. We estimate a CAGR of 108% for the Company recurring profit in FY15-19, which eliminates fair value changes on investment properties and related deferred tax, exchange gain or loss and fair value changes on derivative component of convertible bonds. The Company sustained a lucrative blended gross margin level of more than 50% during FY15-19 and its blended gross profit margin reached 64.2% in FY19.

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2

418

802

1,035

1,237

1,750

0

500

1,000

1,500

2,000

2015 2016 2017 2018 2019

Headline Net Profit (RMB mn)

Source: Company data

58

604 650

765

1,103

0

500

1,000

1,500

2015 2016 2017 2018 2019

Recurring Net Profit (RMB mn)


52.5%50.0%

65.3%

59.5%

64.2%

30%

40%

50%

60%

70%

2015 2016 2017 2018 2019

Blended Gross Profit Margin

Source: : Company data

A Vote of Confidence by industry leader China Vanke In 2015, the Company successfully introduced the industry leader China Vanke (2202 HK) and Shenzhen Pingan Dahua Huitong Wealth Management Co., Ltd., which is a subsidiary of Ping An Insurance (2318 HK), as its cornerstone investors via share placements. At the end of 2015, Shenzhen Pingan Dahua Huitong Wealth Management Co., Ltd. transferred its equity in the Company to Toplist Investments Limited. The controlling shareholder Mr. Wong Hong King currently holds 70.6% of the Company's issued share capital whilst China Vanke and Toplist Investments Limited each owns 5.9% stake in the Company. Besides, the Company issued sizeable amount of convertible preference shares, which are owned by its major shareholder and certain financial institutions.

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3

The Company’s shareholding structure as at FY19-end


A Rational Property Market is Beneficial for the Property Developers Thanks to the various control measures by the authorities, the mainland real estate industry has gradually become more rational which reduced property speculation and excessive increase in housing prices. It is believed that a standardised and stable market environment will be more beneficial to the progress and development for property developers. As one of the most dynamic cities in China, Shenzhen experienced the continuous influx of incoming talents and the rising population of high-quality and high-net-worth individuals which provided sustainable and favourable support to the demand for residential and commercial properties.

According to the “Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area”, the framework for an international first-class bay area and world-class city cluster should be formed by 2022 whilst an international first-class bay area for living, working and travelling should be fully developed by 2035. The Outline Development Plan pinpointed Hong Kong, Macao, Guangzhou and Shenzhen as core engines for regional development and the Guangdong-Hong Kong-Macao Greater Bay Area will take a leading role in the country’s economic development and opening up with the continued introduction of talents and capital. Thanks to the favourable policies and lucrative economic development potential, the demand for high-quality commodity housing in Shenzhen and the Greater Bay Area will increase steadily in the future and the turnover of the property market will maintain a stable growth.

Real Estate Development is the Core Business of the Company Real estate development and sales is the core business of the Company as it accounted for 86% of the total revenue in 2019. The Company adopts the strategy of “Focus on urban renewal in the Greater Bay Area, Develop a brand new smart city” in its pursuit of breakthrough in urban renewal space.

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86%

9%5%

Real estatedevelopmentand sales

Commercialpropertyinvestment andoperationsComprehensiveservices

Revenue Breakdown by Business Mode, 2019


85%

12%2%

Real estatedevelopmentand sales

Commercialpropertyinvestment andoperations

Comprehensiveservices

Gross Profit Breakdown by Business Mode, 2019


The Company focused on core districts in core cities of the Guangdong-Hong Kong-Macao Greater Bay Area, such as Shenzhen, Hong Kong, Zhuhai and Dongguan. It launched various top-notch projects that are widely acclaimed by the industry and its clients, which enable it to emerge as a distinctive real estate developer and operator in core cities of the bay area and a leading regional enterprise.

With an aim of introducing an innovative development model that integrates technology and real estate through strategic upgrade, the Company entered into strategic cooperation agreements with Huawei Technologies Co., Ltd. (one of the leading technology enterprises) and China Unicom (one of the three major telecommunication operators in the PRC) to pioneer the development of its infrastructure projects, thereby establishing itself as a new smart city developer that is dedicated to the construction of the Guangdong-Hong Kong-Macao Greater Bay Area by leveraging the strong alliance and efficient industry application of the Internet of Things, cloud computing and 5G technologies.

Decent Profitability amid Low Land Acquisition Cost Since 2014-end, the Company's asset scale has steadily increased and the Company's total asset more than doubled to RMB48.7 bn by the end of 2019. Due to the large size of individual projects and uneven completion period, the Company’s property sales has been erratic during early phase of development (FY15-17) but it sustained an upward trend in the last two financial years (FY18-19). Total contracted sales amounted to RMB6.28bn in FY19 (FY18: RMB4.24bn), up 48% YoY. Total contracted sales area came in at 263,000 m2 in FY19, up 10% YoY. In terms of geographical breakdown, Shenzhen, Huazhou, Zhuhai and other areas contributed 73%, 18%, 6% and 3% of total contracted sales in FY19, respectively. Among which, Shenzhen LVGEM Mangrove Bay No. 1 (located at Futian District of Shenzhen) was re-launched and received an overall sell-through rate of approximately 80% and contributed RMB4.46bn to contracted sales in FY19. Other projects that were launched for sales included LVGEM International Garden (located at Huazhou City of Maoming in Guangdong); LVGEM Amazing Plaza (located at Nanshan District of Shenzhen) and LVGEM Joyful Town (located at Xiangzhou District of Zhuhai). Contracted liabilities, which represents sales deposits and advance payments received from sales of properties and will be subsequently recognised as sales, came in at RMB2.5bn as at FY19-end. As the Company’s urban renewal projects in the core districts of the Greater Bay Area have gradually reached the maturity stage, it is expected that they will continue deliver stable growth in contract sales in the next few years.

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5

576

3,956

2,114

3,664

5,962

0

1,000

2,000

3,000

4,000

5,000

6,000

2015 2016 2017 2018 2019

Revenue from Real Estate Development and Sales (RMB mn)


As rapid urbanization has led to the decline in available land resources in developed cities, urban renewal plays an increasingly important role in urban construction and landscape upgrade. Leveraging on its more than 20 years of experience in urban renewal space, the Company adopts the two-way expansion model which comprises of mainly urban renewal and, to a lesser extent, market auction, in order to garner cost advantages over land auctions. Instead of acquiring land resources through other intermediary companies, the Company directly collaborates with villagers and organizations to achieve a more favourable land cost.

From a low base of 31.5% in 2015, the gross profit margin from property sales improved to lucrative level of 47.0-65.0% during FY16-19, which was mainly thanks to the low cost advantages brought by the land acquisition for urban renewal via direct collaboration with villagers and organizations. Despite renovation projects typically incur higher administrative and finance costs, given more project management personnel costs are needed and longer development period, we estimate the Company’s underlying blended net margin remained respectable at 13-22% in FY16-19.

31.5%

47.0%

65.0%

57.8%

63.5%

20%

30%

40%

50%

60%

70%

2015 2016 2017 2018 2019

Gross Profit Margin - Real Estate Development and Sales

Source: : Company data

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Thanks to the increased development scale, the company's inventory (property under development for sale and property held for sale) gradually increased over the last few years and reached RMB10.63bn as at FY19-end. As of the end of FY19, the company's attributable land reserves amounted about 4.5mn m2, more than 60% of which are located in the Greater Bay Area with strategic layout in Shenzhen, Hong Kong, Guangzhou, Zhuhai and Dongguan. In addition to the remaining phase of LVGEM International Garden at Huazhou, the remaining saleable area of its land reserves came in at about 1.52 mn m2 as at FY19-end. In terms of projected sales proceeds from its current land bank, it is estimated that Shenzhen projects to dominate given their much higher ASPs than Huazhou’s.

Major upcoming sales proceeds in coming 2-3 years from its development projects include Mangrove Bay No. 1, LVGEM Amazing Plaza and LVGEM Liguang Project in Shenzhen; Dongqiao Urban Renewal Project and LVGEM Joyful Town in Zhuhai; LVGEM International Garden in Huazhou; and Lau Fau Shan Project in Hong Kong. Including the projects to be completed in 2020-21, and the contracted liabilities of RMB2.5bn as at FY19-end, which represents sales deposits and advance payments received from sales of properties and will be subsequently recognised as sales, we estimate property sales may amount about RMB14-16bn during FY20-21, which represents 2.3-2.7x of its recognized sales in FY19. The management guided that the Company may fetch sales growth of 0-10% YoY during FY20-21.

Breakdown of the Company’s and its Controlling Shareholder’s Land Bank as at FY19-end


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Favorable Asset Injection Strategy The Company has been working in collaboration with the controlling shareholder, who integrates land resources for project incubation and primary development, and injects the projects to LVGEM (China) when the time is ripe. In 2017, the controlling shareholder provided a letter of intent to inject the urban renewal projects into the Company according to the development pace. This arrangement allows the Company to acquire high-quality land reserves without the need of lengthy time for development at competitive price.

A typical asset injection happened on 28 December 2018, whereby the Company purchased 39.6% stake in the project company owning urban redevelopment project in Xiangzhou District, the core district of Zhuhai of Guangdong. The project has a total site area of approximately 207,200 m2 and is semi-developed. It is expected to be developed into a residential and commercial complex with a total gross floor area of 794,000 m2 with the incorporation of the Company’s concept of design for smart urban regions. Given the estimated fair value of the project company amounted RMB142mn, the purchase consideration of RMB20mn represents 64% discount to the attributable fair value of the stake. Meanwhile, the Company completed its acquisition of a 25% stake in the Baishizhou Renewal Project via the acquisition of project company for a nominal consideration of US$10,000 on 28 October 2019.

Similar to the mega asset injection valued RMB13.8bn in 2015, the Company will likely purchase urban renewal land from its controlling shareholder after the controlling shareholder completes the integration of land resources for project incubation and primary development. In terms of settlement of purchase consideration, the Company may also adopt the hybrid of issuing new shares or convertible preference shares to the controlling shareholder to satisfy a major portion of the asset injection.

This land acquisition model brings certain advantages to the Company: (i) it can avoid the risk of uncertainty in the early stage of urban renewal projects as the asset injection is conducted after the land is ripe for development; (ii) the company does not need to obtain excessive external financing, which can reduce financial cost and cash flow pressure; (iii) the land cost should be comparatively lower compared with acquiring via land auction, which can increase the gross profit margin of the project.

There is plenty of quality assets in the injection pipeline as the controlling shareholder currently holds urban renewal projects with a total GFA of 10 million m2 in Shenzhen, Zhuhai and Zhang Mu Tou, Dongguan, all of which are located at core locations in Guangdong-Hong Kong-Macao Greater Bay Area. The geographical mix of the land bank owned by the controlling shareholder came in at 5.5 million m2 for Dongguan, 2.7 million m2 for Shenzhen, 1.3 million m2 for Zhuhai and 0.9 million m2 for other areas. The Company will consider purchasing high-quality urban renewal projects held by the controlling shareholder in the same approach in order to accelerate the growth momentum.

Stable Recurring Income from Commercial Properties Operation By owning and operating high-quality commercial properties at supreme locations, the Company sustains stable recurring income and cash flow that lays a solid foundation to support the Company’s future growth. Moreover, the Company is poised to enjoy lucrative capital gain from the quality assets.

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For the segment of “Commercial Property Investment and Operations”, the Company maintains two major commercial brands, namely “NEO” and “Zoll”, which operate commercial building and retail properties, respectively. The Company’s major commercial buildings include NEO Urban Commercial Complex in Shenzhen and Hong Kong LVGEM NEO located in Kowloon East whilst its main retail premises include LVGEM Zoll Hongwan Shopping Centre, LVGEM Zoll Chanson Shopping Centre and LVGEM 1866 Zoll Centre in Shenzhen, and LVGEM Zoll International Garden Shopping Centre in Huazhou etc. The total gross floor area of Commercial Property Investment and Operations came in at approximately 612,700 m2 as at FY19-end. Among the total rental income of RMB619 mn in FY19, NEO contributed about RMB333 mn, Zoll contributed RMB169 mn and other investment properties RMB117 mn in FY19. Benefited from the prime district location and market positioning of tenants, Shenzhen NEO Urban Commercial Complex still maintained an overall occupancy rate of 83% in FY19. Hong Kong LVGEM NEO had its grand opening on 8 November 2019 and recorded an occupancy rate of nearly 50% as at the end of 2019 despite various social incidents. If fully occupied, Hong Kong LVGEM NEO might contribute an annual rental income of HK$300 million to the Company. The latest appraised value of Hong Kong LVGEM NEO came in at about HK$11bn as at FY19-end. Regarding its retail properties, the overall occupancy rate was about 97%. The construction of LVGEM Zoll Mangrove Bay No. 1 Shopping Mall and Dongguan LVGEM Zoll Shopping Mall was completed during FY19. They will be open for business during 2020 - 2021 and are expected to foster rental income growth for the Company.

Breakdown of the Company’s Investment Properties


Revenue from the investments and operations of commercial properties steadily

increased from RMB413 mn to RMB619 mn in FY15-19. Segmental gross profit margin was high at 84.3-89.0% during FY15-19, which were much higher than the gross profit margins of the Company’s two other major segments.

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9

413 430

498

543

619

300

400

500

600

700

2015 2016 2017 2018 2019

Revenue from Commercial Property Investment and Operations (RMB mn)

Source: Company data,

85.3% 85.2%86.2%

84.3%

89.0%

70%

73%

75%

78%

80%

83%

85%

88%

90%

2015 2016 2017 2018 2019

Gross Profit Margin - Commercial Property Investment and Operations

Source: : Company data,

Quality Supplemental Income from Property Management and Hotel Operations For the segment of “Comprehensive Services”, the Company is engaged in property management services and hotel operation services, which contributed total revenue of RMB321mn in 2019. Segmental gross profit came in at RMB95.2mn in FY19, translating to a gross profit margin of 29.6%. According to the management, the gross profit mix between property management services and hotel operation services came in at 3:1 in FY19.

222 204

355

308 321

0

100

200

300

400

2015 2016 2017 2018 2019

Revenue from Comprehensive Services(RMB mn)

Source: Company data,

46.0%

34.5%

37.7%

35.3%

29.6%

20%

30%

40%

50%

2015 2016 2017 2018 2019

Gross Profit Margin - Comprehensive Services

Source: : Company data,

Property management services include security services, as well as maintenance and management of properties and facilities. The Company provides comprehensive property management services for most of its real estate development projects, which comprised of a total gross floor area of 2.42 mn m2 as at FY19-end.

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In respect of hotel operations, the Company operates and manages two hotels in Shenzhen and the United States. (LVGEM Hotel located in the central business district of Futian district in Shenzhen and the Vanllee Hotel situated in Covina of California). LVGEM Hotel, which has a total gross floor area of 25,751 m2, hosts over 330 guest rooms, multifunctional meeting rooms, banquet hall and video conference room. With its prestigious geographical location and the provision of attentive services, the LVGEM Hotel recorded an average occupancy rate of about 75% in FY19. It Is planned to be upgraded and renovated into a smart business hotel with an aim to further enhance its market competitiveness The Vanllee Hotel, which is located in Covina of California, occupies a site area of 22,652 m2. The hotel was acquired by the Company in 2017 and it represents a milestone as it marked the Company’s foray to the international business. The renovation of the Vanllee Hotel has been completed in 2019 and is expected to contribute additional income stream to the Company.

Manageable Debt Position The Company’s cash balance totalled RMB8.35bn as at FY19-end, up 10% YoY. We estimate the Company’s net debt grew from RMB12.8bn as at FY17-end to RMB15.9 bn as at FY18-end and RMB18.0bn as at FY19-end. The hike in net debt position was mainly attributable to its acquisition of the Hong Kong LVGEM NEO for about HK$9 bn. The average finance cost for the Company came in at 6.3% in FY19 whilst its debts were denominated in RMB, HKD and USD in a 50:30:20 mix as at FY19-end. Although we estimate its gearing ratio to come in at about 1.4x as at FY19-end, its debt servicing capability remains manageable with an interest coverage of about 3x in FY19.

Earnings Forecasts For real estate development segment, major upcoming sales proceeds in next 2-3 years will be stemmed from key projects that include Zhuhai Dongqiao Urban Renewal Project, LVGEM Amazing Plaza, LVGEM Liguang Project, LVGEM Mangrove Bay No. 1, LVGEM Joyful Town, LVGEM International Garden and Hong Kong Lau Fau Shan Project. Despite the fact that the epidemic caused a temporary interruption with work suspension or production shut-down of different extents once occurred throughout China, it is believed that the one-off impact would not materially affect the Company’s real estate development segment. The management guided that the Company may enjoy 0-10% YoY in property sales in FY20 and FY21 and they hinted that gross margin to hold steady compared with FY18-19 levels. This is mainly attributable to the fact that the high margin Mangrove Bay No.1 project will continue to recognize sales whilst the Zhuhai projects will contribute higher amount of sales in FY20-21. After a muscular 79% YoY segmental profit growth in FY19, we project real estate development segment to hold firm with a sequential 4-10% YoY leap in segmental profit in FY20-21.

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For commercial properties operation, we think the fuller contribution from the Hong Kong LVGEM NEO will provide the major growth driver in FY20 and FY21. Hong Kong LVGEM NEO, which occupies a site area of approximately 4,500 m2 meters and a planned total gross floor area of approximately 55,390 m2, is located in “Kowloon East

CBD 2”, the new central business district in Hong Kong. The project represents a

strategic step for the Company to create a meaningful presence in the Hong Kong property market and brand image in the Guangdong-Hong Kong-Macao Greater Bay Area. Having acquired the building at a consideration of HK$9 bn in 2017, the property had its grand opening on 8 November 2019 and recorded an occupancy rate of nearly 50% as at the end of 2019. It is expected the annual rental income from the Hong Kong LVGEM NEO may reach about HK$300 mn in case if it is fully leased. We forecast commercial properties operation to sustain 15% YoY and 8% YoY revenue growth in FY20 and FY21, respectively.

We believe the Vanllee Hotel is poised to make more meaningful contribution after the completion of its renovation. However, the profit contribution will depend on the occupancy rate achieved, given the impact after the outbreak of the coronavirus. Longer term, the Company’s management fee income pool will be boosted as the scale of its property management services will be enlarged after the completion of more real estate development projects. All in all, we forecast the Company’s recurring income to post 14% and 12% YoY leap to RMB1,257mn and RMB1,404mn in FY20 and FY21, respectively.

Valuation and Risks We use sum-of-the-parts valuation to value the Company. We adopt (i) a forward PER of 6.5x and 25x to value its real estate development and property management businesses, the former is in line with the average of major mainland property developers which is justifiable given its distinguished growth trajectory from acquiring quality land bank at decent cost via asset injection from its controlling shareholder whilst the latter is at a discount to the valuation of its listed larger peers (PER of 30-40x); (ii) a cap rate of 3% or a PBR of 1x to value its commercial property; (iii) 1x PBR for its hotel operation; and (IV) 1x PBR for its adjusted net debt and property inventories. Our assessed fully diluted NAV for the Company comes in at RMB25,207mn. Our assessed fully diluted per share NAV (accounting for the dilutive convertible preference shares and convertible bonds) arrives at HK$3.10/share.

Asset Valuation Basis (RMB mn)

Real Estate Development Business 6.5x forward PER 6,695

Property Inventories 1x PBR 10,634

Commercial Properties Business 3.0% cap rate or 1x PBR 23,621

Property Management Business 25x forward PER 750

Hotel Business 1x PBR 302

Adjusted Net Debt 1x PBR (16,795)

Total 25,207

Source: Company data, CMBC Securities Research estimates

Fully Diluted NAV Estimate of the Company

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Fully Diluted NAV Estimate of the Company HK$27,576mn

The Company's total issued shares 5,050.46mn

Dilutive convertible preference shares 3,442.21mn

Dilutive convertible bonds 402.00mn

Total 8,894.67mn

Per Share Fully Diluted NAV Estimate of the Company HK$3.10


Per Share Fully Diluted NAV Estimate of the Company

Risks for attaining our target price includes: (i) Lower than expected property prices; (ii) Deterioration in economy that affects rental income; (iii) Significant dilution from issuance of new shares.

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Appendix 1. Financials

Income Statement

Year Ended December 31 2017 2018 2019 2020F 2021F

RMB mn RMB mn RMB mn RMB mn RMB mn

Real estate development and sales 2,114.3 3,664.3 5,962.4 6,558.7 7,214.6

Commercial property investment and operations 498.3 543.2 618.7 711.5 768.4

Comprehensive services 355.2 308.2 321.3 347.0 374.8

Turnover 2,967.8 4,515.7 6,902.4 7,617.2 8,357.7

Real estate development and sales 1,374.5 2,119.7 3,784.8 3,935.2 4,328.7

Commercial property investment and operations 429.4 457.7 550.4 633.2 683.9

Comprehensive services 134.0 108.8 95.2 104.1 112.4

Gross profit 1,937.9 2,686.2 4,430.4 4,672.5 5,125.0

Other income and gains. net 121.6 155.1 112.3 123.5 135.9

Selling expenses (67.7) (133.0) (134.1) (137.1) (150.4)

Administration expenses (361.6) (390.4) (461.5) (418.9) (417.9)

Other income 480.8 495.7 676.2 - -

Finance costs (613.6) (658.0) (1,256.2) (1,381.8) (1,520.0)

Share of results of associates (0.1) (0.0) (0.0) (0.0) (0.0)

Profit before taxation 1,497.4 2,155.5 3,367.1 2,858.2 3,172.6

Taxation (458.8) (925.1) (1,617.2) (1,600.0) (1,767.1)

MI (3.2) 6.8 (0.1) (1.0) (2.0)

Net profit 1,035.4 1,237.2 1,749.9 1,257.2 1,403.5

Recurring net profit* 649.8 765.3 1,102.6 1,257.2 1,403.5

Key ratios

GPM - Real estate development and sales 65.0% 57.8% 63.5% 60.0% 60.0%

GPM - Commercial property investment and

operations86.2% 84.3% 89.0% 89.0% 89.0%

GPM Comprehensive services 37.7% 35.3% 29.6% 30.0% 30.0%

Blended GPM 65.3% 59.5% 64.2% 61.3% 61.3%

Selling expenses / Turnover 2.3% 2.9% 1.9% 1.8% 1.8%

Administration expenses / Turnover 12.2% 8.6% 6.7% 5.5% 5.0%

Tax rate 30.6% 42.9% 48.0% 56.0% 55.7%

Recurring net margin 21.9% 16.9% 16.0% 16.5% 16.8%

Source: FY17-19 data and recurring net profit are from the Company, FY20-21 data are from CMBC Securities Research estimates

* Recurring net profit excludes fair value changes on investment properties and related deferred tax,

exchange gain or loss and fair value changes on derivative component of convertible bonds

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Balance Sheet



Cash and cash equivalents 3,975.2 3,674.0 5,542.9 7,251.7 9,117.1

Retricted cash 2,117.5 3,915.8 2,804.1 2,804.1 2,804.1

Bill and trade receivables 377.3 11.6 31.2 37.5 44.9

Inventories 6,352.0 10,710.3 10,633.8 11,165.5 11,723.8

Other receivables 1,138.3 890.3 3,230.9 3,392.5 3,562.1

Other current assets 182.6 38.6 33.6 33.6 33.6

Total current assets 14,142.8 19,240.6 22,276.5 24,684.8 27,285.6

Net PP&E (including AUC) 413.9 458.4 996.0 996.0 996.0

Investment properties 19,650.7 22,117.3 23,567.5 23,567.5 23,567.5

Equity investments 6.1 6.1 6.1 6.1 6.1

Investments in securities or others 444.3 490.8 541.1 541.1 541.1

Total investments 450.3 496.9 547.2 547.2 547.2

LT deferred tax assets 175.2 345.0 565.7 565.7 565.7

LT deposits and receivables 1,732.3 522.3 551.7 551.7 551.7

Goodwill 231.6 231.6 231.6 231.6 231.6

Total assets 36,796.8 43,412.1 48,736.3 51,144.6 53,745.4

Liabilities

Accounts payable 600.0 1,383.5 1,111.8 1,227.0 1,346.2

Short-term debt 4,315.7 5,824.4 11,071.5 11,071.5 11,071.5

Other current liabilities 4,735.1 4,481.9 5,577.3 5,856.2 6,149.0

Total current liabilities 9,650.9 11,689.7 17,760.7 18,154.7 18,566.7

Long-term debt 14,594.1 17,698.2 15,245.2 16,007.4 16,807.8

Deferred tax liabilities 2,482.7 2,585.3 2,695.6 2,965.2 3,261.7

Total non-current liabilities 17,076.8 20,283.4 17,940.8 18,972.6 20,069.5

Total liabilities 26,727.6 31,973.1 35,701.4 37,127.3 38,636.2

Common shareholders' equity 9,836.1 11,331.4 12,927.9 13,909.3 14,999.2

Minority interests 233.1 107.5 107.0 108.0 110.0

Total liabilities and equity 36,796.8 43,412.1 48,736.3 51,144.6 53,745.4


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Cash flow statement



Operating activities

Profit before taxes 1,497.4 2,155.5 3,367.1 2,858.2 3,172.6

Depreciation and amortization 35.3 40.5 37.4 41.1 45.3

Net profit/loss on asset sales (0.2) 0.0 (32.4) 0.0 0.0

Increase/decrease in working capital (272.2) 967.9 (1,966.3) (305.5) (323.3)

Other operating cash flow items (32.2) (408.3) (265.7) 319.7 (2.8)

Net CF flow from operating activities 1,228.1 2,755.6 1,140.1 2,913.6 2,891.8

Investing activities

Capital expenditure (292.7) (1,268.1) (230.1) (300.0) (400.0)

Acquisition/divesture (4,518.1) (1,590.0) 299.0 0.0 0.0

Proceeds from disposal of assets 0.2 0.1 25.1 0.0 0.0

Other investment cash flow items (1,524.6) (3,561.0) 514.4 0.0 0.0

Net CF flow from investing activities (6,335.4) (6,419.0) 608.4 (300.0) (400.0)

Financing

Dividends paid (211.2) (203.0) (234.2) (275.8) (313.7)

Share repurchase/issue 0.0 784.7 7.1 0.0 0.0

Increase/decrease in debt&notes payable 6,866.8 4,251.7 2,062.2 762.3 800.4

Change in Minority interests 0.0 1.4 0.0 0.0 0.0

Other financing cash flow items (797.0) (1,295.7) (1,739.2) (1,391.3) (1,113.1)

Net CF flow from financing activities 5,858.6 3,539.0 96.0 (904.8) (626.3)

Total cash flow 751.3 (124.4) 1,844.5 1,708.8 1,865.4


Company Report

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Disclosures

I, Cho Fook Tat, being the person primarily responsible for the content of this research report, in whole or in part, hereby certify that all of the views expressed in this report accurately reflect my personal view about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. I and/or my associates have no financial interests in relation to the listed company(ies) covered in this report, and I and/or my associates do not serve as officer(s) of the listed company(ies) covered in this report.

Disclosures of Interests

CMBC Securities Company Limited and/or one or more of its affiliates may pursue financial interests to the companies mentioned in the report.

Disclaimers

This report is for our clients only and is for distribution only under such circumstances as may be permitted by applicable law. It has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either expresses or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. This report should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without notice and may differ or be contrary to opinions expressed by other business areas as a result of using different assumptions and criteria. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information. CMBC Securities Company Limited is under no obligation to update or keep current the information contained herein. CMBC Securities Company Limited relies on information barriers to control the flow of information contained in one or more areas within CMBC Securities Company Limited, into other areas, units, groups or affiliates of CMBC Securities Company Limited. The compensation of the analyst who prepared this report is determined exclusively by research management and senior management (not including investment banking). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of CMBC Securities Company Limited as a whole, of which investment banking, sales and trading are a part. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. The price and value of the investments referred to in this research and the income from them may fluctuate. Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. For investment advice, trade execution or other enquiries, clients should contact their local sales representative.

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