20210409-招银国际-Tactical_RV_trade_opportunity_between_CAPG,TPHL_and_KWGPRO_curve_4页_493kb

CMBI Credit Commentary Summary

Core Content

This document provides a credit commentary and analysis on the tactical RV (Real Estate) trade opportunity between CAPG, TPHL, and KWGPRO curves, focusing on the 2021 financial results and the company's leverage and URP (Unrecognized Revenue Potential) conversion strategy.

Main Points

1. CAPG's Financial Performance and Leverage

• On April 8, 2021, the CAPG curve dropped by 2-3 points due to market concerns over balance sheet transparency and mixed 2020 results.
• CAPG's leverage increased, driven by aggressive land acquisitions with a lower attributable ratio.
• Management has guided a more prudent land budget for 2021.
• CAPG achieved RMB133bn in contracted sales in 2020, with 85% cash collection and an attributable ratio of ~71%.
• The company spent RMB52bn on land investment (with RMB6.7bn unpaid), acquiring 20mm sqm GFA (59% attributable).
• CAPG has RMB243bn in saleable resources, with a cost/ASP ratio of ~33%.

2. URP Conversion and Saleable Resources

• CAPG has converted RMB38.2bn in URP into saleable resources, which is ~16% of total land acquired in 2021.
• The attributable ratio of newly acquired land is lower than existing land bank (~70%), which may affect future leverage.
• CAPG's land bank has an estimated salable value of RMB621bn, sufficient to support development for ~4 years.
• The company targets to convert RMB160bn in saleable resources from URP over 3 years, starting with RMB40bn in 2021.
• Faster URP conversion is expected to mitigate investment pressure and support profitability.

3. Deleveraging Strategy and Outlook

• CAPG's deleveraging target is achievable, supported by:
  • Sizable unrecognized revenue (RMB196bn as of 2020, including RMB40bn at JCE level).
  • Abundant saleable resources, allowing land acquisition spending to remain below 25% of contracted sales.
  • URP conversion, which increases saleable resources and profitability.
• Net gearing increased to 83% in 2020 from 75% due to higher total debt.
• CAPG aims to reduce debt by at least 5% annually and meet the three-red-line regulation by 2022.

4. Comparison with Peers

• The spread between CAPG and KWGPRO / TPHL has widened to 150-250bps, indicating a tactical trade opportunity.
• The author prefers the belly of the CAPG curve (CAPG 23-25s) over the KWGPRO / TPHL curve.

5. Minority Interest (MI) Analysis

• CAPG's MI / Equity ratio rose to 66% in 2020 (+7ppts yoy), driven by:
  • Introduction of third-party investors into URPs.
  • Consolidation of Aoyuan Beauty Valley (29.3% equity interest).
  • Higher cooperation in property development projects.
• MI / Equity ratio is higher than peers, but it is part of an industry trend.
• Peer developers' MI / Equity ratios:
  • KWGPRO: increased from 6% (2019) to 19% (2020) (+13%).
  • TPHL: increased from 54% (2019) to 59% (2020) (+5%).
  • PRWLNG: increased from 16% (2019) to 29% (2020) (+13%).
  • LOGPH: increased from 20% (2019) to 30% (2020) (+10%).

6. Unrecognized Revenue and Profitability

• Unrecognized revenue (as of 2020) is RMB196bn, which can support 2021 revenue targets.
• Contract liabilities increased to RMB69bn, with ~RMB30bn collected in 1Q2021.
• The gross margin from URP is 35-40%, compared to 26-28% from current unrecognized revenue.

Key Information

• CAPG's URP conversion is a key driver for deleveraging and profitability.
• The spread widening between CAPG and KWGPRO / TPHL suggests a tactical opportunity for investors.
• CAPG's deleveraging is supported by saleable resources, URP conversion, and prudent land budgeting.
• The three-red-line regulation is expected to drive reduction in land investment by 2022.
• Minority interest is a major concern but is increasing across the industry.

Contact Information

• Wilson Lu 路伟同: (852) 3761 8918 | wilsonlu@cmbi.com.hk
• Polly Ng 吴宝玲: (852) 3657 6234 | pollyng@cmbi.com.hk
• CMBI Fixed Income Department: fis@cmbi.com.hk

Disclaimer

• This report is for informational purposes only and not investment advice.
• Investors should independently evaluate the information and consult a financial advisor.
• CMBIS may have investment banking relationships with the companies discussed.
• Conflicts of interest may exist, and CMBIS is not liable for any losses resulting from reliance on the report.

Additional Notes

• The report is subject to change without notice.
• CMBIS may issue other reports with different conclusions.
• The document is not suitable for all investors, and distribution is restricted in certain jurisdictions.