Karl Shen and Zhao Chen
Fubon Securities (Hong Kong) Limited
1) China Aoyuan Property (3883 HK)
An an investment holding company headquartered in Guangzhou, China Aoyuan Property’s (Aoyuan) core business is boutique property development with residential and commercial real estate projects located in Guangdong and Shenyang, as well as in Beijing, Chongqing, Guangxi and Jiangxi.
The company’s development strategy accelerated in 2012 after freeing up HK$3 billion in its former Beijing Project, and pre-sales – which recorded significant growth in 2013. Trading at a 25% discount to his target price of HK$1.67 and a 50% discount to his net asset value (NAV), Shen regards Aoyuan as an under-researched, under-valued jewel that’s yet to be unearthed.
“Aoyuan’s established ‘residential plus commercial dual core model’ is easy to replicate from one project to another, and via this model and mechanism, the company is able to carry out its distinct ‘fast development, fast sales strategy,” says Shen.
Ranked high among the top 100 real estate developers in China, Aoyuan expects its current land bank of 11.18msm to support five to seven years of future development. Shen expects Aoyuan to record over 40% annual revenue growth during 2014-2016 but at a declining rate due to concerns of a property market slowdown. “If Aoyuan continues to deliver better-than-expected and consistent performance going forward, lower NAV discount should be justified, providing further upside potential,” says Shen.
2) SPT Energy (1251 HK)
Founded in 2008, the Beijing-based investment holding company is principally engaged in providing oilfield services including drilling, well completion, reservoir, with ancillary activities in trading and manufacturing of oilfield services related products mainly in China, Kazakhstan and Canada.
SPT’s overseas operation was severely affected by devaluation of the Kazakh Tenge – the currency of Kazakhstan – in February. But due to its dominant position in the Tarim Basin in northwest China, Chen expects SPT to continue to benefit from the fast growing natural gas development in the region.
He remains conservative on the company’s short-term revenue growth in FY14 due largely to tensions between Russia and Ukraine escalating devaluation risk. Nevertheless, Chen expects the company’s competitive advantage in reservoir studies, and its light-asset strategy to help SPT continue to enjoy rapid growth in the China market. “Based on a 30% discount to DCF value of HK$6.0, we arrive at a target price of HK$4.20, suggesting 14x FY14F PE, and 30% discount to that of Anton, implying a 5% share price upside,” says Chen.
Given the size of its shale gas reserves in China and the projected increase in the country’s natural gas consumption, much of SPT’s growth looks to be ahead of it.
SPT’s shares have surged almost threefold in Hong Kong in the past year.
Orient Securities (Hong Kong) Ltd
1) Powerlong Real Estate Holdings (1238 HK)
Powerlong Real Estate Holdings Limited is engaged in property development, property investment, hotel operations, property management and other property development related services in China.
Given the size of its land bank – amounting to a total gross floor area of approximately 7.8 million square metres – Gong expects 2014 to be a landmark ‘harvesting’ year for the Shanghai-based investment holding company. Expected to contribute to solid growth over the next few years are the 10 projects (total 39 projects) that Powerlong recently acquired with total gross floor area (GFA) of 2.2 million sqm – 20% of its total land bank – at an attractive cost of Rmb2,200/sqm.
In addition, six acquisitions are located in Tier 1/2 cities, which are expected to ensure a better sell-through rate and decent profitability.
Thanks largely to a positive rental revision and increasing investment portfolio, Powerlong rental income and management fee grew by around 40% in 2013.
For the three months ended March 31, 2014 total contracted sales value and total contracted sales area amounted to approximately RMB 1,494 million and 183,236 square meters, up 26% and 12% respectively year-on-year.
“Powerlong has prepared c.Rmb20-25 billion saleable resources for 2014, and we expect its presales to grow steadily – assuming a 50% sell through rate,” says Gong.
In December Powerlong launched two new malls in Shanghai and Jinjiang with occupancy rate of 95%, which are expected to contribute over Rmb100 million rental income in 2014. Together with four new malls with total GFA of 249k sqm, Gong expects its rental income to hit Rmb1 billion in 2014.
“We are positive on Powerlong’s growing presales and rental income, increasing exposures in tier 1/2 cities and low-cost acquisitions should boost its profitability in 2014/15,” says Gong.
The stock currently trades at around a 50% discount to Gong’s target price of HK$2.50 and a 70% discount to 2014 NAV of HK$8.2.
2) Shimao Property Holdings (813 HK)
A Hong Kong-based investment holding company founded in 2004, Shimao Property Holdings develops residential, office, and commercial properties, plus hotels and shopping malls. The company is also involved in trading construction materials, real estate marketing and architectural, design, management, and consultancy services.
Due largely to strong presales, up around 45% year-on-year, operating profit from core business – attributable to equity holders – for the year ending 31 December 2013 increased by 22.9% to approximately RMB 12.34 billion.
Gong expects growth in the average selling price (ASP), up around 15% in 2013 to contribute positively to improved profitability in 2014/15. He attributes significant improvement from ‘execution to strategy’ and from ‘operation to financial’ to the recent of hiring industry elites, plus efficient teamwork between company owners and senior management.
“Shimao’s success, together with strong performance by Country Garden, challenges the view that private developers find it difficult to become industry leaders. We expect more private developers to follow such practice and enter rerating stage,” says Gong.
He expects Shimao to achieve Rmb100 billion presales in 2014 thanks to over Rmb150 billion saleable resources. In addition, he expects profitability to continue to increase courtesy of improved quality and operation, lower financing cost and a growing selling price.
Gong introduced a 2014 net asset value (NAV) of HK$39.7 and revised his price target to HK$22.9 – from HK$22.4 – based on 40% discount to NAV – from 35% – due to growing uncertainty within the credit environment. Despite downside risk from lower than expected presales, he expects strong presales to drive the share price.
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