With a portfolio of 17 investment properties and 1.5m m2 of total GFA located in prime locations in Beijing and Shanghai, SOHO China aims to be the largest prime office land-lord in China. We recognize the cultural/economic value of SOHO China’s assets, but are concerned about its ability to execute as planned.
SOHO China is led by a savvy management team, willing and capable of protecting shareholder interests through corporate actions, such as share repurchases. This provides some downside protection.
SOHO China’s assets are all located in prime locations with cultural/economic sig-nificance. We believe the company could be the best play on China’s high-end of-fice market as its assets mature.
The company’s 180-degree transformation of its business model from “build-to-sell” to “build-to-hold” implies potential execution risk due to different skill-sets required for the two models.
The transformation and resulting lack of saleable resources also implies a decline in contracted sales, revenue, and core net profit in the foreseeable future. While this outlook is expected by market, we believe earnings may still disappoint.
We believe more time is needed for SOHO China to show its ability to succeed with its “build-to-hold” model, and initiate coverage on SOHO China with a HOLD rating. Our price target of HK$6.94/share is based on a 10% discount to our estimated net asset value (NAV) of HK$7.71/share, suggesting 5% upside. Upside risk: better-than-expected office market performance, share buyback and land acquisitions that could drive the share price . Down-side risks are execution and macro-economic risks.