What surprised us
1H14 underlying profit was down 59% yoy to HK$512mn, or 23%/24% of FY14 GHe/Bloomberg consensus (vs. 64% in 1H2013). Highlights: 1. We see pressure to sustain 1H GPM (recovered 6pp hoh to 25% on the back of 28% higher booking ASP) given unbooked ASP is 14% lower than 1H and increasing pressure to clear inventory (Rmb14bn at 1H14, -10% from end-13 but likely rebound in 2H due to GFA2.2mn sqm completion against 1.5mn sqm sales). Also we think its new investment ytd is unlikely to generate better profitability than existing land bank given they are either purchased at high land cost (i.e. in Shanghai) or located in weak markets (i.e. Ningbo and Harbin). So overall we project 24% GPM for 2H14-16. 2.We expect end-14 net gearing to further rise to 114% from 109% at 1H as we see another Rmb2bn net cash outflow in 2H on top of Rmb7.2bn in 1H mainly due to budget overrun of its land capex (1H acquisition accounted for 75% of presales vs. average 44% in 2011-13). In addition, we note that its total indebtedness rose 20% from end-13 to HK$51bn, or 1.7X of equity vs. average 1.2X for peers’ reported 1H financials. We believe it could take some time for the deleveraging process to take effect. 3. Management maintains Rmb28bn presales target for FY14 based on 48% sell-through in 2H vs. 42% in 1H.
What to do with the stock
We cut 2014-16 underlying EPS by 17%-24% to reflect higher financing costs and lower margins, and as a result our12-m NAV-based target price by 9% to HK$4.22, which is still based on 60% discount to end-14E NAV. It is trading at 67% discount to end-14E NAV/6.9X 14E P/E vs. peers’ average 54%/6.4X. Stay Neutral. Risks: Stronger/Weaker-than-expected sales/ margins, positive progress of the potential restructuring with Poly A.1H2014 results comparison