Investment highlights
What's new: SOHO China announced on Thursday along with the poor interim result that it would strategically transformed its core business from develop-for-sale to develop-for-hold, it would take three years to complete all existing 1.5 mn sq.m. commercial properties located in Beijing and Shanghai while aimed at an annual rental income of RMB 4 bn within five years.
We don't expect the market would look positive on this transformation, especially given the decision came on the heels of worse-than-expected contracted sales in the first half 2012. And in our viewpoint, however, it's also quite challenging for the near-term in terms of cash flow pressure as well as lack of experience in operating commercial portfolios (currently it only hold one retail project in Beijing Qianmen with annul rental income of as small as RMB 91 mn).
Following the business re-positioning, SOHO China also revised FY sales target down by 50% to RMB 11 bn. It further pointed out that totally there would be only RMB 18 bn pipelines still planned for sale and of which approx. RMB 7B would be available for sale for the rest of this year.
Take unbooked proceeds of RMB 23B and the remainder RMB 18B sales pipelines into account, total proceeds available for booking in 2012-2014 may drop to RMB 40B compared to our estimated RMB 60B. We revised 2012-2014 EPS down by 12%/38%/66% respectively to RMB 0.68, 0.55 and 0.33. The contribution of rental income would still be limited over the period.
Key reading of 1H 12 Results: 1) SOHO China reported a 54% top-line decrease or 65% bottom-line decrease for the first half 2012, mainly due to there's no new projects was completed and therefore available for booking over the period. An interim DPS of RMB 12 cents was declared for 1H12, compared to RMB 14 cents for 1H11. 2)After a serious of acquisitions, we saw the company no longer hold the net cash position at the end-June 2012, it showed that cash on hand dropped from RMB 16 bn to RMB 9 bn while gearing increased to ~20%. And in opposite to the acquisitions, there's little improvement of SOHO's contracted sales, as what's accomplished in Jan-Aug 12 still decreased by ~25% from comparable period last year, or only RMB 6 bn.
SWS viewpoint: Some investors may hope on the long-run growth potential given the attractive asset return of SOHO China's prime located commercial properties, however, even we assume it could finally achieve the annual rental income of RMB 4 bn with net margin promising to beat ~50%, current market cap has already corresponded to around 12.5 times PE ratio, which in our viewpoint was over-valued compared to peer's average PE ratio of ~15 times especially given the limited track record. We cut 6-M TP to HKD 4.64 (or ~10x PE) and downgrade to Underperform.