Poly Property reverse roadshow in Ningbo and Shanghai; Buy on valuation
Ningbo home prices remain stable and expected to increase in 1H2013 During the Poly Property reverse roadshow in November, we visited the two latest projects: "Ningbo Poly Jordan International" in Yuyao district and "Ningbo Poly City" in Zhenghai Xincheng in Ningbo. As regards Shanghai projects, Poly Property has six currently. With the growing development of Ningbo and the expansion on the outskirts of Shanghai, we think project developments in these two cities will continue to see sustainable growth.
Ningbo home prices remain stable and expected to increase in 1H2013
Poly Property officially entered the Ningbo market at the end of 2010 and in 2011 to acquire two land lots, in Yuyao and Zhenghai Ningbo, respectively. Currently, the major first-tier developers in Yuyao and Zhenghai Ningbo are Poly Property, CR Land, Vanke, Wanda, etc. Although there is a Home Purchase Restriction (HPR) in Ningbo, according to Poly's local management team, the selling price in Ningbo hasn't dropped in the past year and there aren't many available inventories for developers in Yuyao, so the ASP is estimated to remain stable or even increase by around 5-8% in 1H2013.
Price competition in Jiading district Shanghai since 2012 to lower ASP
Poly Property has acquired the first land lot in Jiading since 2007 and currently it has a total of 13 land lots and five for residential. According to the local management team, Poly has spent around Rmb4.8bn acquiring land area of approximately 1.93msqm in Jiading. House prices in Jiading have dropped in 2012 because Longfor launched new projects and cut its selling prices. While ASP has decreased this year, Poly believes that ASP in Jiading will be more stable or increase slightly due to the market recovery.
Operation turnaround continues
In the past, the relatively slow sales and higher net gearing of Poly Property has led to market concerns about its asset turnover and financial health; hence Poly has been trading at a bigger NAV and PB discount compared to its state-owned peers and other bigger private developers. In our view, with its acceleration in sales in 2012 and prudent landbanking strategy now, its asset turnover should continue to pick up and net gearing should decrease, which should help drive a valuation re-rating for the stock
Attractive valuation - well below other state-owned peers
Poly is now trading at a 57% NAV discount, 5.8x 2013E P/E and 0.6x P/B - attractive in our view. As Poly's sales continue to accelerate and its net gearing falls, we expect to see more NAV and P/B discount-narrowing for the stock. Our target price of HK$7.82 (revised down from HK$10.95 on 21 September) is based on a 30% NAV discount. We lowered our NAV, target price and earnings as we factor in more conservative assumptions on property delivery and ASPs. Risks: unexpected economic volatility and unexpectedly harsh government tightening measures.