What’ s new: We visited ~10 projects developed by Poly Property (119.HK) this week in Guiyang and Nanning, and met with its local management team during the trip. The original intention of this trip is that some investors are concerned about the housing supply pressure and sales outlook in lower tier cities, while Guiyang and Naning, which we classify into 3rd tier cites, account for 50% of Poly’s total landbank and one-third of its total sales.
As a whole, the key information from our visit is quite positive. We find in these two cities where it has entered for nearly seven years, Poly has already developed its competitive edge in brand name, market share and execution capability. Though some individual project faces supply pressure (like high-rise apartment project in Guiyang), we believe on the one side the remaining such kind of salable resource is quite limited, and on the other side we do find the huge home demand existing in these two cities(high-quality property is still scarce, especially in Guiyang there are still old houses everywhere). Therefore, we are optimistic about these two cities’ sales outlook next year. Even we do not take possible new land replenishment into account, these two cities could still contribute contracted sales of RMB 8bn in 2013, which will further improve Poly’s sales visibility next year.
Valuation is still convincing: Currently it is trading at 52% disc to NAV, 6.0x 2013PE and 0.7x 2013PB, very attractive as compared to sector average of 36% disc to NAV, 8.3x 2013PE and 1.2x 2013PB. Though we believe Poly deserves further re-rating, we keep its target NAV disc of 50% unchanged for the moment since the whole sector is still facing the policy overhang. But as compared to its peers, its downside risk is quite limited. So we remain Poly Property as our top pick due to its higher sales visibility next year and convincing valuation.