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Shimao Group saw its share price retreat 10.4% on Friday. The firm’smanagement held a press conference on Saturday at which itsoftened growth guidance. Since Shimao may not officially announceits 2021 target until earnings season (March 2021), we think its shareprice will continue to face some pressure short term. Thus, we cut TP31% to HK$31.09 (6.7x 2021e P/E, 26% upside) and remove it fromour top picks. But we maintain OUTPERFORM rating as we expectShimao to generate above-peers average growth in the medium termby capitalizing on its abundant land reserves and solid financials.
Comments
Management softens sales guidance in 2021, but still expects thefirm to outperform top 10 peers. Shimao has reduced product supplyby Rmb10–20bn in 2020 to hedge temporary pressure on salesmargin. As such, we expect full-year sales of Rmb300–310bn (vs.
previous market expectation of Rmb320–330bn). For 2021,management expects average sales growth of less than 10% for top10 peers, and expects Shimao to exceed this level, implying over 10%sales growth given its favorable resources. Existing land bank isenough for around 4 years of development, with average land cost at30% of ASP, and as much as 80% of reserves in mid/high-level cities.
Solid financials to strengthen position in medium term. Shimaoshould be categorized into yellow grade based on its 1H20 financialreport. We think it is likely to improve to green grade by the year end,with spin-off of property management arm lending extra support.
Together with edge in financing (investment grade from Fitch, avg.
funding cost at 5.5%), we think Shimao is capable of seizing moremarket share and keeping its top 10 position in the medium term.
Generous dividend payout to be sustained. In addition to thedividend from its core business (35–45% on core profit), the firmplans to distribute a special dividend in 2020 based on disposal gainsfrom property management spin-off. Shimao plans to spin off itshotel operation business in 2021 in a similar way, followed bypossible special dividend accordingly.
Valuation and recommendation
We cut 2020–2021 earnings forecasts by 3% and 7% to Rmb12.4bn(+19% YoY) and Rmb14.6bn (+18% YoY) on lag in delivery and weakersales growth in 2020–2021. Disposal gains from the spin-off ofproperty management and hotel operation business (if any) are notconsidered in our earnings forecasts. The firm is trading at 6.2x and5.3x 2020e–2021e P/E, at a 49% NAV discount, 2020-2021e dividendyield of 6.8% and 8% Risks: Unexpected tightening of new home pricelimits in tier-1/-2 cities.