Core net profit drop due to timing issues. SOHO’s 1H12A core net profit of CNY233m represents a drop of 65.5% YoY, worse than our expected CNY452m due to difference of timing of project. The group’s major development project, Galaxy SOHO will be completed and delivered to buyers in 2H12F. Interim DPS of CNY0.12 (-14.3% YoY) is better than our expectation and translated into a core payout of 266% (1H11A: 108%).
Transforming to a landlord; cloudy short-term outlook. SOHO said it intends to change its “build-sell” business model to the “build-hold” business model in order to capture the huge growth in rental and value for prime office buildings in Beijing and Shanghai. The anticipated annual rental income will be CNY4b in 5 years, from below CNY100m currently.
We believe that the transformation will need time and financial resources to support – scarifying short-term profitability and opportunity costs for enhancing long-term profit visibility. The company intended to keep 1.5m sqm (versus 0.6m guided previously) of properties under development as investment properties, including 2 major projects, Sky SOHO and SOHO Century Plaza in Shanghai originally to be launched in 2H12.
Impact on FY14F earnings more significant. YTD till Aug 13th, contracted sales reached CNY6.02b and accounted for 50.1% of SOHO’s FY12F revised sales target of CNY12b (from CNY23b). The company turned into a slight net gearing position of 27.1% (net debt of CNY5.9b inclusive of convertible bond, versus 1H11A’s net cash of CNY0.9b) and is inline with our expected 30% or below. On land acquisition front, due to change in business model, SOHO will not stick to its original CNY10b acquisition target for FY12F (YTD utilization of only 26.4%). Yet, core cities (particularly Beijing) projects with potential are still priority of purchase.
Downgrade to HOLD on uncertainty. We cut our FY13F net profit by 16% to CNY4.05b due to change of business model, and introduce FY14F net profit estimate of CNY2.99b (-26% YoY). We also cut our RNAV by 2.6% accordingly to HKD11.60. Our new TP of HKD5.59 represents a 51.8% (0.5x SD below mean, previous 42.8%) target discount, translating into a 3.5% upside. We downgrade the counter from BUY to HOLD. Prefer Yuexiu Prop (123) and SOL (3377) in the mid-cap developer sector.