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Summary of DBS Group Research Report on China Resources Land (1109 HK)

Core Content

This report provides an analysis of China Resources Land (CR Land), focusing on its financial performance, strategic direction, and valuation as of 26 August 2013. The report highlights the company's efforts to expand nationally and improve long-term profitability, despite short-term challenges in margins and rental growth.

Main Points

Company Overview

• Industry: Financials, specifically in Real Estate Holding & Development
• Principal Business: Property development and management
• Market Cap: HK$129,993 million / US$16,761 million
• Issued Capital: 5,829 million shares
• Major Shareholders: China Resources (Holdings) holds 67.99% of shares, with 32.01% free float
• Average Daily Volume: 9.8 million shares

Recent Performance

• 1H13 Revenue: Increased by 99% to HK$15,775 million
• Core Earnings: Rose by 51% to HK$1,667 million
• EPS (HK$): Increased by 20% to 0.753
• DPS (HK$): Increased by 16% to 0.073
• Payout Ratio: 21% for 1H13, compared to 27% in 1H12

Financial Position

• Net Debt Ratio: 38%, improved from 40% in end-FY12
• Cash on Hand: HK$21.2 billion (slightly down from HK$22 billion in end-12)
• Average Financing Cost: Dropped to 3.57% from 4.2% in 1H12
• Total Borrowing: Increased by 8% to HK$57 billion
• Debt Currency: 74.7% in HKD, which is more attractive than RMB borrowing due to lower rates

Valuation Metrics

• Price Target: HK$24.49 (12-month), down from previous HK$24.32
• P/E Ratio (FY14): 12.5x, trading at 18% discount to NAV
• NAV (Net Asset Value): HK$27.2, up slightly by 1%
• P/Book Value (FY12): 1.9x, declining to 1.4x by FY15
• EV/EBITDA (FY12): 9.3x, declining to 6.9x in FY15
• Net Dividend Yield: Increased from 1.5% to 2.4% by FY15
• ROAE (Return on Assets Equity): Rose from 16.3% in FY12 to 14.0% in FY15

Strategic Focus

• National Expansion: Completed in 2013, with future acquisitions targeting tier I/II cities to improve margins
• Land Bank: As of mid-August, total land bank is 30.8 million square meters, of which 25.33 million is for residential and 5.55 million for investment properties
• GFA Delivery Target: 98% locked in for FY13
• Unbooked Sales: Rmb50.6 billion to be booked in 2H13

Operational Challenges

• Gross Margin: Dropped to 28% in 1H13 from 33% in previous estimates due to lower margins on new projects and increased costs
• Shenzhen MIXc: Rental growth slowed to <5%, impacted by slower high-end sales and tenant mix adjustments
• Core Profit: Increased by 51% due to strong revenue growth and improved recurring income

Future Outlook

• Gross Margin Recovery: Expected to improve in 2014 and 2015, with a projected 31%/32%/33% for FY13/FY14/FY15
• New Projects: Launch of MIXc City in Wuxi, Hefei, Qingdao, and Zhengzhou in 2014
• Long-term Sales Target: Rmb100 billion by 2015
• Foreign Exchange Risk: Closely monitored due to high HKD debt exposure

Key Catalysts

• Stronger-than-expected presales
• New land acquisitions and project launches
• Improvement in operating efficiency and tenant mix

Analysts

• Carol WU: +852 2863 8841, carol_wu@hk.dbsvickers.com
• Danielle Wang CFA: +852 2820 4915, danielle_wang@hk.dbsvickers.com
• Andy YEE: +852 2971 1773, andy_yee@hk.dbsvickers.com
• Ken HE CFA: +86 21 6888 3375, ken_he@hk.dbsvickers.com

Valuation Comparison

Conclusion

The report maintains a BUY recommendation for CR Land, despite short-term margin pressures. The company is expected to benefit from its national expansion, improved land bank, and focus on tier I/II cities. While EPS growth has been adjusted downward, the company is still projected to achieve over 20% annual growth from 2012 to 2015. The P/E ratio is currently 18% below NAV, suggesting potential undervaluation. The analysts recommend continued monitoring of foreign exchange risk, tenant mix upgrades, and the success of new projects in 2014.