Big disappointment seen in FY12 results; Rights issue a big surprise
More evidence is required to prove that the next three-year plan will be successful
The only bright spot is its YTD pre-sales were stronger than expected; sustainability is key
Downgrade to SELL with a new TP HK$2.7; Cut EPS and NAV to factor in rights issue impact
FY12 results substantially below estimates. Core profit was Rmb201m, 75% and 83% below our and market estimates, mainly due to completion delays. Its net debt ratio dropped from 75% in 1H12 to 70% despite an enlarged equity base from the issuance of perpetual securities. To our surprise, Shui On announced a 1-for-3 rights issue to raise < HK$4bn at an offer price of HK1.84 or 45% discount to the closing price on Mar 28. While management explained the move was to lower its gearing, we view the rights issue, along with the frequent issuance of debts/perpet ual securities last year, could trigger concern over its poor cash flow management and its capability to maximise shareholder value.
Management needs to do more to restore market confidence. Shui On missed many targets set in its past three-year plan. In the second three-year plan, the company was to spin off China Xintiandi to allow it to have more room to speed up asset turn. It will also start to buy smaller-sized land to develop mid-to-high end products to diversify risk. In our view, more evidence is required to restore investors’ confidence given its weak track record. Its expansion into the mid-to-high end segment could also face many challenges as it is not Shui On’s core strength.
Downgrade to SELL. We have revised downwards FY13/14F EPS and NAV/TP by 34/36% and 24/24% to factor in its new completion schedule and the impact from its rights issue. It is now trading at a 19x FY13 P/E, 38% discount to NAV and 0.5x P/B (vs. mid cap average of 7.6x P/E, 44% discount to NAV and 1.1x P/B). While YTD pre-sales have reached Rmb5.1bn or 46% of its target, we are concerned about the sustainability of its strong pre-sales given the potential policy headwind in the high-end segment. We expect its share price to go under selling pressure following the rights issue and its uncertain outlook.