20200331-尚乘集团-绿景中国地产-00095.HK-Solid_Execution_on_Highly_Profitable_Urban_Redevelopment_Land_Bank_5页_1mb

LVGEM (China) Real Estate Investment Company Limited Summary

Core Financial Performance

LVGEM delivered strong financial results in 2019, with core net profit exceeding expectations by 26%, reaching RMB1,236m, a 43% YoY increase. The company's revenue rose by 53% YoY to RMB6,902m, primarily driven by the successful sales of the Mangrove Bay No.1 project in Shenzhen, which contributed ~65% of total revenue in 2019. The gross profit margin remained at 64%, above the industry average, due to the profitability of urban redevelopment projects.

2020E Outlook

For 2020, the company is projected to achieve a core net profit of RMB1,745m, representing a 41% growth from 2019. The sales from Shenzhen Urban Redevelopment projects Mangrove Bay No.1 and Beijing Plaza are expected to be the main contributors, with an aggregate contracted sales of approx. RMB6bn recognized in 2020E. The company has RMB15bn of sellable resources across GBA urban redevelopment projects.

The core net profit margin is estimated at 22% for 2020E, and gross margin is expected to rise to 66.9%, reflecting continued strong performance from its redevelopment portfolio.

Key Projects and Development

• Mangrove Bay No.1 contributed significantly to 2019 revenues and is expected to be a key earnings driver in 2020E.
• Beijing Plaza is another major project in Shenzhen, contributing to the 2020E sales.
• Baishizhou Project is expected to take over as the key growth driver from 2022 onwards, with the developer targeting to complete Phase 1 relocation contracts by 3Q20. The project has a total GFA of 3.58m sqm, with 1.8m sqm of sellable/leasable GFA. The company plans to acquire the remaining 75% stake from the controlling shareholder, depending on market conditions and development progress.

Balance Sheet and Leverage

• Net gearing increased to 135% in 2H19, up from 121% in 1H19, mainly due to the acquisition of the Zhuhai Dongqiao project.
• The company's net debt to equity ratio is projected to decrease slightly to 129.7% in 2020E, then to 126.8% in 2021E, before rising again to 132.8% in 2022E.
• Total assets are expected to grow from RMB43.4bn in 2019 to RMB58.2bn in 2022E, with total assets to equity ratio decreasing from 374% in 2019 to 326% in 2022E.

Valuation and Price Target

• The price target (TP) was trimmed to HK$2.72 from HK$3.00, reflecting rising macroeconomic risks, particularly due to the impact of the COVID-19 pandemic.
• The TP is based on a 7.0x target 2020E P/E, with an upside of 17% from the current price of HK$2.32 as of 30 Mar 2020.
• Key valuation ratios include:
  • P/E (2020E): 6.0
  • P/BV (2020E): 0.73
  • Dividend yield (2020E): 3.7%
  • ROE (2020E): 12.2%
  • ROA (2020E): 3.4%

Risks and Challenges

• Dilution overhang from the conversion of the controlling shareholders' preference shares.
• Revaluation loss to the HK NEO property may further pressure the balance sheet.
• Higher acquisition costs for the remaining 75% of Baishizhou project could lead to potential equity issuance and further dilution.
• HK NEO occupancy rate remains at 50%, and management faces challenges in increasing it amid the slowdown in macroeconomy.

Share Price Performance

• The share price performance is visualized in Figure 1, showing the company's financial forecasts and key ratios.
• Earnings per share (EPS) is projected to increase from RMB0.25 in 2019 to RMB0.52 in 2022E, with core EPS growing from RMB0.18 in 2019 to RMB0.31 in 2022E.
• Dividends per share (DPS) are expected to rise from RMB0.06 in 2019 to RMB0.12 in 2022E, with core DPS increasing from RMB0.03 in 2019 to RMB0.07 in 2022E.

Rating and Analysts

• Stock rating: Hold, indicating a potential return of -20% to +20% over the next 12 months.
• Analysts: Jacky Chan and Karen Huang from AMTD Equity Research.

Key Forecasts Table

(RMB m)	2019	2020e	2021e	2022e
Revenue	6,902	8,066	10,954	12,326
Core Net Profit	1,236	1,745	1,825	2,614
Gross margin	64.2%	66.9%	52.4%	58.2%
Net gearing	135.2%	129.7%	126.8%	132.8%
Core EPS	0.25	0.35	0.37	0.52
DPS	0.06	0.08	0.08	0.12
BV per share	2.59	2.87	3.15	3.56

Important Disclosures

• AMTD has an investment banking relationship with LVGEM within the past 12 months.
• The research report is strictly confidential and should not be reproduced or redistributed without prior written consent.
• The research report is based on reliable sources, but no warranties are given regarding its completeness or accuracy.
• Credit ratings are opinions and not recommendations or facts.
• The analysts certify that the views expressed are their personal opinions and not influenced by compensation or investment banking transactions.