Reiterating Buy; re-rating on faster property asset turnover
Shui On Land's reported declines in 1H12 net profit should not cause too muchconcern, in our view, because the decline was due to an uneven distribution ofsaleable resources and property completions in 1H vs 2H. As more saleableresources in Shanghai and in non-core commercial properties should becomeavailable in 2H, we expect to see an acceleration in property sales in 2H12,which should present positive catalysts. In addition, with more plannedproperty delivery in 2H, we expect to see strong earnings momentum in 2H.
1H12 core net profit down due to uneven property delivery in 1H vs 2H
Shui On Land (SOL) reported 1H12 net profit of RMB825mn, up 5% YoY.
Excluding the increase in fair value of investment properties, core net profitwas down significantly because of uneven completion of properties for sale. In1H12, recognized property sales were mainly from Chongqing and Dalian, andvery few were recognized from the two flagship projects in Shanghai(Taipingqiao and RHXC); as such, overall recognized ASP was down 17% fromRMB26,000psm in 1H11 to RMB21,700psm in 2H12. However, overall grossmargin stayed high at 45% in 1H12, suggesting there were not that many pricecuts involved. An interim DPS of HK$0.025 was declared, unchanged YOY,reflecting management’s strong confidence in the earnings outlook for 2H12.
Sales momentum in 2H likely to pick up with more flagship launches
At end-July, SOL achieved contracted sales of RMB2.1bn, plus subscriptionsales of RMB0.7bn. In 2H12, SOL has saleable resources of about RMB11bn,and planned new launches include a brand new phase Ph 5 of Rui Hong XinCheng and a new phase at Jiangwen Regency in Shanghai. In addition, thesale of a tall office tower at Chongqing Tiandi is now also in the final stage ofnegotiation. If these three are sold, sales proceeds would be about RMB5bn.
Valuation attractive at a 63% NAV discount, 0.4x P/B, 5% 2012E dividend yield
Our target price of HK$5.01 is based on a 40% discount to our estimated NAVof HK$8.35, which factors in 10-20% declines in ASPs in Tier-1/2 cities. Keyrisks:1) stricter-than-expected government tightening measures, 2) unexpectedeconomic fluctuations in the Chinese economy, 3) competition from othercommercial properties in mainland China, 4) potential delays in completion ofnew properties and 5) slower-than-expected ramp-up of investment properties.