Summary]:Investment highlights
What’s new: Poly property reported Apr sales up 132% yoy to RMB 2.2B, as comparable to that of RMB 2.9B, RMB 1.3B and RMB 2.5B for Jan-Mar respectively. By the end of Apr totally it achieved RMB 8.9B contracted sales for the first four months, representing a 207% yoy growth or 34% out of FY target RMB 26B.
The amazing high yoy growth for Jan-Apr should be partly attributed to the low base same time last year, however, given project launches may also start to gain pace in this May and Jun, we estimate 1H 13 sales is likely to beat RMB 14-15B, implying yoy growth for the first half this year may still amount to 40-50%.
Underpinned by the asset injections from parent company during 07-10, Poly property has been fast growing in the past five years with contracted sales leaping from 2007’s RMB 2.3B to 2012’s RMB 23B. Especially it’s noteworthy the company achieved above 40% sales growth during the pretty harsh property control cycle of 2010-2012, which in our viewpoint helped to demonstrate the improvement of execution capabilities.
We’re upbeat on the sustained growth profile of Poly and believe concentration in 2nd and 3rd tier cities may protect it from policy risks this year. After corrections of share price in Q1, we believe current valuation is quite attractive and we upgrade it to Buy with more than 30% upside potential.
Differ from consensus:
1)Margin has already bottomed. We believe investor’s concern on Poly’s margin erosion is overdone. Though the GPM declined to 30% in 2012 from 40% in 2011, the mgmt guided it would not go down further this year based upon un-booked proceeds. And we’re also upbeat on profitability going forward as the pricing power would come back further following the physical market recovery in lower tier cities. 2)Gearing would continue drop. Poly’s balance sheet has been stretched during the large scale acquisitions of 07-10 and as a result the net gearing surged to above 100% in 2011. However, the ratio has already been cut by 10 ppts in 2012 thanks to the positive operating cash flow, and we anticipate it would continue drop by another 10 ppts to ~80% by the end of this year.
Key assumption: We believe Poly’s contracted sales would be less impacted by the austerity measures given its geo locations and we assume sell-through rate could hold firm at last year’s level. Under such assumption we expect this year’s sales growth may at least beat 20%. And accompanied with the pricing power recovery, we forecast an above 25% CAGR for earnings during 2013-2015. Valuation and TP: The company is now trading at ~54% disc to NAV, 0.7x 2013 PB, 6.8x 2013 PE, which in our viewpoint is attractively low as comparable to sector average’s ~34% disc to NAV, 1.2x 2013 PB, 8.2x 2013 PE. We keep 6-M TP unchanged at HKD 7.58 (~40% disc to NAV) and upgrade Poly to Buy rating.
Catalysts: Contracted sales continue to rise in May and June
Primary home sales stay resilient in lower tier cities
Risks: Additional property tightening
monetary policy turns to prudent.