Initiate at BUY; TP of HKD5.79 derived from a 45% discount (vs 5-yrhistorical avg of 39%) to our NAV of HKD10.52, representing upside of45%. Our TP translates to 8.0x 2013 PER, 6.4x 2014 PER and 0.7x2013 book value. We also see improvement in Poly’s financial healthbringing down finance cost and believe its sales momentum will remainstrong in 2013 to beat its full-year sales target of CNY26b by 10% toCNY28.5b given a sales target locked-in ratio of 44% as at May-2013.Valuation reflects most negatives. Poly’s share price performancehas been one of the worst among China’s property players. We believePoly deserves a rerating from its distressed valuation as investors haveoverlooked recent improvements in its asset turnover, locked-in ratioROE and financials.
Accelerating asset turnover to lift prolonged low ROE. Poly hadone of the sector’s lowest underlying ROE last year at 8.7% and onlySino-Ocean had a worse ROE of 7.2% among our covered stocks. Weattribute this to little GFA delivered compared to a relatively sizeableasset base and low underlying margin (high SG&A and mixed trackrecord of GPM-projects). However, we believe the worst is over andexpect ROE to improve to 10% and 12% in 2014 and 2015, not too farfrom peers. Streamlining the organizational structure is still not on theagenda, but we believe more reasonable landbanking ytd and fasterasset churn will help raise ROE.
Faster development cycle: Examples include a recent launch ofKunming Poly Sky and Earth, which took 9 months from landacquisition to presale. There should be ample saleable resources ofCNY28b in 2H13 to ensure sales, even with a less-friendly mortgageenvironment.
From dividend suspension in 2011 to 30% payout. Since improvingits cashflow and financial position, Poly resumed dividend payments in2012 and expects a long-term dividend payout ratio of 30%.
We are a tad below-consensus on 2014 and 2015 GPM but morebullish on earnings outlook (11% above 2015 net profit). We expectPoly to benefit from a warming up of the physical market in 3rd tiercities and a faster development cycle. We view the valuation of 62%discount to our NAV, 4.4x 2014 PER, and 0.5x 2014 book value asappealing.