Lacklustre leasing progress call s for better utilisation of funds. As this was the first results announcement since the change in business strategy, SOHO China disappointed investors with the slow leasing progress of key assets. On the other hand, the company has spent RMB832m on share repurchase to support the share price over the pa st six months. In our view, investors should prefer a better utilisation of resources to improve the underlying operations. A portion of the repurchase proceeds would be sufficient to build a world class asset management te am, giving investors the confidence that the company is committed to build a strong recurrent income stream to succeed the asset sale business model. We believe the ultimate positive catalyst is enhanced execution, but not continuous share repurchases.
Strong balance sheet bodes well for sensib le acquisitions to fill earnings gap. The gradual depletion of saleable resources has been well expected. While on ly a few completed properties are ready for income generation, we estimate an earnings gap from 2014 onwards. We believe SOHO China could possibly fill the gap by acquiring semi-completed developments that include properties for imminent sale and revenue recognition. The company has set an acquisition targ et of RMB10bn for 2013. We note that SOHO China has a proven record of securing accretive acquisitions at favourable terms.
Share price overhang remains. Since January, the share price was hit by a series of negative media reports on: (1) accusation of assistance in m oney laundering and (2) alleged acquisition for state-owned lands at below-market costs etc. In addition, the company has not resolved the legal dispute on the ownership of Bund 8-1 land in Shanghai. In our view, the share price overhang will continue in the medium-term.
Maintain N with revised TP of HKD6.5. We maintain Neutral as potential acquisitions for imminent sale could compensate the lacklustre leasing performance. SOHO is also a defensive play with lower policy risk under the current market sentiment. NAVe is revised up by 1% to HKD11.6, incorporating the cancellation of shares upon repurchase. We cut our 2013-14e earnings by 1-8% to reflect below-expected leasing take-up. Similarly, we widen the target discount to 45% (-0.5 SD) from 38% (-0.25 SD). We therefore lower TP by 9% to HKD6. 5 from HKD7.1. Key upside risks include: accretive acquisitions that lead to meaningful increase in NAV. Key downside ri sks include: slower-than-expected leasing take-up