20140626-巴黎银行证券-E-commerce_business_taking_shape_13页_404kb

China South City (1668 HK) Summary

Core Content

China South City (CSC) is a leading developer and operator of large-scale, integrated logistics and trade centres in China. The report highlights its strong performance in FY14 and its potential for growth in the e-commerce and logistics sectors.

Key Financial Highlights

• Recurring Income: Expected to reach HKD1.4 billion by 2017E, with FY14 recurring income at HKD656 million, a 112% year-on-year increase.
• E-commerce Contribution:
  • FY14 e-commerce income reached HKD189 million from set-up fees for online shop registration.
  • Expected to double to HKD389 million by 2017E as more tenants from other projects (e.g., Shenzhen CSC) register online.
• Logistics/Warehouse Income:
  • FY14 logistics/warehouse income rose 177% y-y to HKD25 million.
  • Expected to more than double to HKD58 million in FY15, with plans to expand logistics space to 3.4 million sq m (15% of land bank).
• Revenue Growth:
  • FY14 revenue reached HKD13.5 billion, up 80% y-y and 11% above expectations.
  • Projected revenue growth for 2015E to 2017E: 19.1 billion HKD, 25.0 billion HKD, 29.5 billion HKD.
• Net Profit:
  • FY14 recurring net profit was HKD2,678 million, up 51% y-y.
  • Expected to grow to HKD6,523 million by 2017E.
• EPS:
  • FY14 core EPS was HKD0.43, up 45% y-y.
  • Projected core EPS for 2015E to 2017E: HKD0.66, HKD0.86, HKD1.04.
• Valuation Metrics:
  • Recurring P/E: 6.0x for 2015E, which is relatively low compared to IP players in China (more than 10x 2014E P/E).
  • NAV Discount: 64% discount to NAV of HKD10.97 for end 2014, suggesting potential upside.
  • EV/EBITDA: 3.8x for 2015E, with a downward trend.
  • Price/Book: 1.1x for 2015E, with a further decline expected.

Investment Thesis

• Buy Rating: The stock is rated as BUY with a target price of HKD6.03.
• Rationale:
  • The company is expected to benefit from the expansion of the e-commerce and logistics sectors.
  • A unique business model focusing on trade centres in China, which is in expansion mode.
  • Government support and low land costs help maintain a high sustainable gross margin (above 50%).
  • The company is set to benefit from urbanisation and the relocation of old wholesale markets.
• Comparative Valuation:
  • Current valuation is relatively low compared to other IP players and regional logistics companies.
  • With e-commerce and logistics growth, the stock could be valued more in line with logistics companies (14-38x 2014E P/E).

Catalysts for Growth

1. Better-than-expected contracted sales in 1Q15.
2. High dividend payout of more than 30% of core profit.
3. Faster-than-expected contribution from the e-commerce platform and logistics expansion.

Risks

• A slowdown in the relocation of old wholesale markets could lead to weaker-than-expected demand for CSC's trade centres.

Company Background

• Business Focus: Development and operation of large-scale logistics and trade centres.
• Revenue Mix:
  • Property sales: 95.09%
  • Property rentals: 2.38%
  • Hotels/Serviced apartments: 0%
  • Construction services income: 0.37%
• Land Bank: 23 million sq m with seven projects across seven cities in China.
• Cooperation with Tencent:
  • Development of B2B and B2C platforms using WeChat.
  • Creation of an integrated database system.
  • Appointment of a consultancy team to guide e-commerce-related initiatives.

Key Assumptions

• PRC Trade Centre Pricing: 5% for 2015E and 2016E.
• Discount Rate: 12% for both 2015E and 2016E.

Earnings Sensitivity

• Base Case:
  • Core profit for 2015E: HKD4,143 million
  • Core EPS for 2015E: HKD0.66
• Worst Case:
  • Core profit for 2015E: HKD3,622 million
  • Core EPS for 2015E: HKD0.60
• Recurring EPS Growth:
  • 2015E: 44.8%
  • 2016E: 54.7%
  • 2017E: 30.7%

Strategic Expansion

• E-commerce Expansion:
  • Expected to drive growth in both revenue and margins.
  • Membership fees will be charged after initial set-up fees.
• Logistics Expansion:
  • Plan to expand logistics/warehouse space to 15% of total land bank.
  • Current logistics space: 83,000 sq m.
  • Projected logistics income: HKD58 million in FY15.
• Rental Income:
  • Expected to grow to HKD676 million by FY17.
  • Current rental rates are relatively low (RMB20-45/sq m/month), but are expected to rise as synergies with Tencent improve.

Management and Key Executives

• Mr. Cheng Chung Hing: Co-chairman & Executive Director (Age: 52, Since: 2002)
• Mr. Leung Moon Lam: Chief Executive Officer & Executive Director (Age: 57, Since: 2002)
• Professor Xu Yang: Executive Director (Age: 74, Since: 2008)
• Mr. Jiang Kai: Vice President (Age: 61, Since: 2007)
• Mr. Fung Sing Hong: Chief Financial Officer (Age: 48, Since: 2006)

Key Financial Drivers

• Contracted Sales Volume
• Contracted Sales ASP (Average Selling Price)
• Completion Volume

Potential Upside

• A 5% y-y drop in ASP would reduce core net profit by about 5%.
• E-commerce and logistics expansion are expected to significantly boost recurring income and EPS.

Conclusion

China South City is positioned to benefit from the growth in e-commerce and logistics sectors in China. With a strong FY14 performance, a unique business model, and strategic partnerships, the company has potential for significant growth and improved valuation. However, the success of its e-commerce and logistics expansion will be critical to achieving these growth targets.