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Shimao Property (813.HK) - 2014 Market Outlook Summary

Core Content

Financial Performance in 2013

• Total Annual Revenue: Rmb41.5bn, up 45% YoY
• Core Net Profit: Rmb6.4bn, up 88% YoY
• Gross Margin: Increased by 1.8% YoY to 35.3%
• SG&A as % of Revenue: Decreased to 8.6% from 10.0%
• Core Net Margin: Improved to 15.5% from 11.9%
• Final Dividend: HK$0.81 per share, up 47% YoY with a 35% payout ratio

Financial Position and Financing

• Cash: Rmb19.6bn (including restricted cash)
• Total Borrowing: Rmb49.3bn, with short-term debt at 23.9% (down from 30.2% in Dec 2012)
• Net Gearing: Stabilized at 57.4% in 2013, expected to be reduced to 50% by end of 2014
• Interest Rate: Effective interest rate decreased from 7.7% to 7.4%
• Financing Activities: Successfully issued USD800m senior notes and USD570m syndicated loan to reduce high-interest debt

Sales and Development

• Contracted Sales Target for 2014: Rmb80bn, with a sell-through rate of 60%
• Expected Sales Performance: Potential to exceed the target, as 82% of 2014 consensus revenue is expected to be locked in
• Saleable Resources: Prepared 11m sqm with estimated ASP of Rmb12,000psm
• Rigid and Upgrade Demand: 78% of products target these segments
• Sales Schedule: Expected to be Rmb12bn in Q1, Rmb28bn in Q2, Rmb24bn in Q3, and Rmb16bn in Q4

Regional Revenue Breakdown (2013)

• Beijing: GFA 5.6m sqm, Amount Rmb104.0bn, ASP Rmb18,628psm
• Changshu: GFA 125.9m sqm, Amount Rmb1034.0bn, ASP Rmb8,213psm
• Changzhou: GFA 171.5m sqm, Amount Rmb1487.0bn, ASP Rmb8,671psm
• Chengdu: GFA 21.4m sqm, Amount Rmb358.0bn, ASP Rmb16,744psm
• Dalian: GFA 77.6m sqm, Amount Rmb989.0bn, ASP Rmb12,737psm
• Fuzhou: GFA 348.7m sqm, Amount Rmb3889.0bn, ASP Rmb11,152psm
• Hangzhou: GFA 43.5m sqm, Amount Rmb416.0bn, ASP Rmb9,569psm
• Total Revenue: Rmb39,503bn, up 45% YoY from Rmb26,607bn

Landbank and Projects

• Total Landbank: 36.15m sqm across 104 projects in 38 cities
• Landbank Cost: Average Rmb2,341psm, 18% of 2013 ASP
• Landbank Distribution:
  • 45% in Yangtze River Delta (RYRD)
  • 25% in Fujian province
  • Southern China operations, including plots in Guangzhou and Qianhai, Shenzhen
• Key Projects:
  • Ningbo Majia: 100% interest, 82.1k sqm, Rmb805.05m cost
  • Hangzhou Zhijiang: 51% interest, 200.2k sqm, Rmb816.85m cost
  • Suzhou Jinji Lake: 64% interest, 306.1k sqm, Rmb3,024.00m cost

Valuation and Sector Comparison

• Current PE (2014F/2015F): 4.8x / 4.0x, lower than sector average
• Current PB (2014F/2015F): 0.9x / 0.8x, lower than sector average
• Peer Comparison:
  • Country Garden: 4.6x / 3.7x PE, 0.9x / 0.8x PB
  • China Overseas Land: 6.8x / 5.7x PE, 1.2x / 1.1x PB
  • Evergrande: 4.4x / 3.8x PE, 0.7x / 0.6x PB
  • Guangzhou R&F Properties: 4.1x / 3.5x PE, 0.7x / 0.6x PB
  • Longfor Properties: 6.1x / 5.1x PE, 1.0x / 0.9x PB
  • KWG Property: 3.3x / 2.7x PE, 0.5x / 0.4x PB
  • Sino-Ocean Land: 6.0x / 5.1x PE, 0.7x / 0.6x PB
  • Green Town China: 2.5x / 2.2x PE, 0.5x / 0.4x PB
  • China Resources Land: 8.2x / 6.7x PE, 1.0x / 0.9x PB
  • Shimao Property: 4.8x / 4.0x PE, 0.9x / 0.8x PB

Market Indices and Other Indicators

• HK Equities:
  • Hang Seng Index (HSI): Price 21,834, down 0.2% YoY
  • H-share Index: Price 9,874, up 0.2% YoY
• China Equities:
  • CSI 300 Index: Price 2,156, down 0.7% YoY
  • Sh Composite Index: Price 7,173, down 1.0% YoY
  • Sz Composite Index: Price 1,067, down 2.0% YoY
• Asian Equities:
  • Nikkei 225: Price 14,623, up 1.0% YoY
  • Korea KOSPI: Price 1,978, up 0.7% YoY
  • Taiwan TWSE: Price 8,780, up 0.5% YoY
  • India Sensex 30: Price 22,214, up 0.5% YoY
• US/European Equities:
  • DJIA: Price 16,264, down 0.0% YoY
  • S&P 500: Price 1,849, down 0.2% YoY
  • NASDAQ: Price 4,151, down 0.5% YoY
  • UK FTSE 100: Price 6,588, down 0.3% YoY
  • Germany DAX: Price 9,451, up 0.0% YoY
  • France CAC40: Price 4,379, down 0.1% YoY
• Commodity Prices:
  • WTI Oil: $101.3/bl, up 1.0%
  • Gold: $1,292.1/troy oz, down 0.9%
  • Copper: $6,510.0/metric ton, stable
  • Aluminum: $1,729.0/metric ton, stable
  • CRB Index: 304.0, up 0.9%
  • Baltic Dry Index: 1,412.0, down 5.6%
• Interest Rates:
  • 3m UST Yield: 0.03%, down 0.01%
  • 10y UST Yield: 2.68%, down 0.011%
  • HIBOR 3m: 0.37%, down 0.004%
  • USD LIBOR 3m: 0.23%, stable

Shareholding Structure

• Wing Mau Hui: 64.5%
• UBS: 5.0%
• Free Float: 30.5%

Valuation and Performance

• Price (28 Mar): HK$15.40
• 52W High: HK$20.50
• 52W Low: HK$13.22
• Market Cap (HK$mn): 53,478
• Market Cap (US$mn): 6,893
• Total Issued Shares (mn): 3,473
• Average 3mths Turnover (HK$mn): 152

Price Performance

• 1m: -1.3%
• 3m: -13.5%
• 6m: -14.2%

Financial Highlights

• Rental Income: Rmb556m, up 10% YoY
• Hotel Services: Rmb979m, down 2% YoY
• Sales of Properties: Rmb39,503m, up 48% YoY
• Others: Rmb465m, down 14% YoY
• Turnover: Rmb41,503m, up 45% YoY
• COGS (Include LAT): Rmb28,969m, up 45% YoY
• Pre-LAT Gross Profit: Rmb14,641m, up 52% YoY
• Post-LAT Gross Profit: Rmb12,534m, up 44% YoY
• Post-LAT Gross Margin: 30.2%, up 0.1% YoY
• Pre-LAT Gross Margin: 35.3%, up 1.8% YoY
• Other Gains: Rmb253m, down 73% YoY
• SG&A: Rmb3,589m, up 25% YoY
• Operating Profit: Rmb12,336m, up 23% YoY
• Net Interest Income/Expense: Rmb-121m, down 449% YoY
• Income from Associate and Joint Ventures: Rmb844m, up 455% YoY
• Profit Before Income Tax: Rmb13,059m, up 28% YoY
• Corporate Tax: Rmb-2,726m, up 3% YoY
• LAT: Rmb-2,107m, up 128% YoY
• Income Tax Expenses: Rmb-4,834m, up 35% YoY
• Minority Interest: Rmb835m, up 2% YoY
• Net Profit: Rmb7,390m, up 28% YoY
• Core Net Profit: Rmb6,425m, up 88% YoY
• Net Margin: 17.8%, up 2.3% YoY
• Core Net Margin: 15.5%, up 3.6% YoY
• EPS: Rmb2.13, up 28% YoY
• Core EPS: Rmb1.85, up 88% YoY
• Property Contracted Sales: Rmb67,070m, up 45% YoY
• Property Contracted GFA: 5.24m sqm, up 28% YoY
• Property Achieved ASP: Rmb12,801psm, up 14% YoY
• GFA Booked: 3.55m sqm, up 37% YoY
• Booking ASP: Rmb11,116psm, up 8% YoY

Cashflow Analysis (2013 and 2014E)

• Contracted Sales: Rmb67,073m / Rmb80,000m
• Inflow: Rmb57,080m / Rmb68,000m
• Outflow:
  • Land Premiums: Rmb-29,316m / Rmb-27,000m
  • Capex: Rmb-21,776m / Rmb-27,000m
  • Other Expenses: Rmb-11,056m / Rmb-14,000m
• Net Cashflow: Rmb-5,068m / Rmb0

Saleable Resources by Region

• Jiangsu: 870,485k sqm
• Shanghai: 114,348k sqm
• Hangzhou: 144,103k sqm
• Fujian: 1,259,265k sqm
• Ningbo: 311,231k sqm
• Western Area: 304,112k sqm
• Northeastern: 606,930k sqm
• Southern & Central Area: 798,654k sqm
• Other Small Projects: 4,125,934k sqm
• Completed Inventory: 1,025,286k sqm
• Projects Available for Sale: 1,440,737k sqm
• Total Saleable Resources: 11,001,085k sqm

Saleable Resources by Unit Size

• Unit Size < 90: 34%
• Unit Size 90 - 140: 44%
• Unit Size 140 - 220: 12%
• Unit Size > 220: 10%

Summary of Key Points

• Shimao Property reported strong financial performance in 2013 with significant revenue and profit growth.
• The company is targeting Rmb80bn in contracted sales for 2014, with a potential to exceed the target.
• Shimao's gross margin and net margin are expected to remain stable in 2014.
• Net gearing is projected to decrease from 57.4% in 2013 to 50% by the end of 2014.
• The company has a strong landbank with a low average land cost, which supports its competitive advantage.
• The stock is trading at a lower PE and PB than the sector average, suggesting potential for valuation improvement.
• The management has a clear strategy for 2014, focusing on maintaining financial stability and increasing contracted sales.