1H12 results better than expected; significant core net margin expansion
SOHO China reported for 1H12, revenue -54% YoY to RMB1,222mn, grossprofit -62% YoY to RMB582mn, and net profit -65% YoY to RMB613mn.
However excluding after-tax fair value gain on investment properties, core netprofit +17% YoY to RMB295mn, and core net margin expanded tremendouslyby 14.6ppts to 24.1% for 1H12.
Strong financial position with relative low net gearing ratio
SOHO China had very strong financial position, with total cash & cashequivalent and bank deposits of RMB9.2bn and total debt of RMB13.57bn,indicating a net gearing ratio of only 20%, one of the lowest in the sector.
More prime asset acquisition YTD
During 1H12, SOHO China acquired SOHO Tianshan Plaza project, with a totalGFA of approximately 172ksqm, at a total consideration of RMB2.13bn, andcompleted the acquisition of the remaining 20% equity interest of the projectcompany holding SOHO Fuxing Plaza.
Business model transition to capture long-term growth in commercial property
SOHO China has intended to change its “build-sell” business model to the“build-hold” business model in order to capture the huge growth in rental andvalue for prime office buildings in Beijing and Shanghai. SOHO China currentlyintends to hold office and retail areas with a total GFA of 1.5msqm from itsprojects as investment properties.
Attractive valuation, maintaining Buy recommendation
SOHO China is trading at 54% discount to our estimated NAV, 9.3x 12F P/E,1.0x 12F P/B – attractive in our view. We believe SOHO China’s uniquecompetitive strength has not changed and will support share pricenormalization: 1) strong financial position allowing it to take advantage of thecurrent soft market conditions to acquire landbanks; 2) proven ability toexpand its Beijing success into other cities (in particular Shanghai); 3) itscommercial property focus should limit exposure to property tighteningmeasures; 4) good ongoing demand for prime commercial properties. Inaddition, we believe its transition towards developing greater propertyinvestment income should allow it to achieve exposure to long-term capitalappreciation in China's commercial market while its commercial real estatefocus reduces its exposure to competition and policy risk.