SOHO China released FY12 results on Wednesday noon with the core earnings slightly missing forecasts but a stronger‐than‐expected balance sheet and a 5% dividend yield as promised.
We upgrade SOHO China to Neutral with new 6‐M TP to HKD 6.67 and anticipate a near‐term sector‐relative outperform. We believe recent negative news flo ws relevant to the company hasalready been largely factored in , while the on‐going residential tightening makes the commercial developer more defensive.
We a bit over reacted to SOHO China’s drasti c business transition.
Office leasing seems not as challenging as retail. After visiting the newly completed Shanghai Pudong based office building SOHO Century Plaza, we found the leasing performance was betterthan we’ve anticipated (with daily rental beating RMB 9 per sq.m. and occupancy rate alreadyabove 80%). Given 75% of the 1 mn sq.m. investment portfolios S OHO China proposed to hold are office buildings and only 25% are retail properties, even we st ill quite doubt on the company’s experience and expertise in running the retail properties, itseems office leasing much easier to handle and the supply/demand outlook is also better than re tail leasing.
Financial strength well paved for the upcoming CAPEX. Thanks to the ample liquidity in HK last Q4, the company raised another US$ 1B through senior notes issuance and sent its total cashposition to RMB 22B or 30B (if taking RMB 7B cash proceeds to be collected into account). While according to the company guidance it would need ~RMB 23B to complete all the investmentproperties proposed to hold for long‐term rentals. This means the company’s existing financial resouces could already fully cover all CAPEX needed in the next three years, and this has not evenaccounted for the pretty low geari ng and big potential in incre asing the leverage.
But why we only upgrade it to Neutral Little positive catalysts this year. The company still holds approx. RMB12B sellable resources for final sales, but five sixths are stocks instead of new projects. While for the property leasingbusiness, or the segment the company decided to fully concentra te on since 2015, after thecompletion of SOHO Century Pla za in 2012, the next most recent completion would not come untillate this year and the leasing may not be com menced until early next year.
Earnings trend down in 2013 and 2014. As rentals would stay limited (RMB 91mn/148mn of 2011A/2012A and RMB 300mn/466mn of 2013E/2014E) before the completion of all 1 mn sq.m.investment portfolios at the end of 2015, the downward earnings in 2013 and 2014 isinevitable(total booking sources may amount to RMB25B,inclu