Strong sales momentum to continue. After reaching contracted sales ofRMB75.1 bn in 2019, Yuzhou Group (Yuzhou) is expected to achieve itsRMB100.0 bn (+33.1% YoY) sales goal in 2020. Even through the adverseimpact from the COVID-19 pandemic on Yuzhou’s sales in 1Q20, we areconfident that it will catch up in the rest of 2020, given 1) its back-loaded launchplan, 35%/65% for 1H20/2H20; 2) undemanding sell-through target of 56%; and3) 90% of 2020 saleable resources located in tier-1 and tier-2 cities.
Building up reputation in the Yangtze River Delta. After the headquarterswere relocated to Shanghai in 2016, Yuzhou has gradually built up its reputationin the Yangtze River Delta. At the end of 2019, this region accounted for 43.3%of Yuzhou’s total land bank. Gross profit margin in this region is expected at acomfortable level of 25-27%. Besides Yangtze River Delta, the Greater Bay Areashould be another strategic focus for the company, which we expect to accountfor 20% of its total land bank in 3-5 years.
A high dividend player. Yuzhou has been historically generous in its dividendpolicy. In 2019, the company declared a full-year dividend of HK$0.40/share(including special dividend: HK$0.07/share) with a dividend payout ratio of 45%to core net profit, implying attractive 2020F/2021F dividend yield of 9.5%/10.9%.
Initiate with "Buy" at TP of HK$5.50. Our target price is based on a 50%discount applied to our 2020F NAV of HK$10.90/share, representing 5.9x 2020Fcore PER. Short-term catalysts for Yuzhou include: 1) potential M&A in Chengduwith approx. RMB20.0 bn saleable resources to sustain future scale growth; and2) possible property management spinoff as soon as 2020 end. Key risks: 1)concentration risk in the Yangtze River Delta area and West Straits Zone; and 2)margin compression pressure.