Action
We upgrade Future Land (“FL”) from SELL to HOLD as we believe its current share price has already factored in most negatives and market expectations are now more realistic. While we see FL making steady progress in balance sheet repair, its unexciting sales growth in 2014 (+16% YoY) looks unlikely to reignite market interest.
Reasoning
Earnings beat on one-offs. FL reported in-line 2013 revenue of Rmb20.8bn (+19% YoY), but core NP of Rmb961mn (+6% YoY) beat our estimate by 25%, primarily due to a positive surprise in other income of Rmb152mn (2012: Rmb9mn) and other gains of Rmb46mn (2012: Rmb14mn). Most other income came from the premium paid by the Changzhou government to acquire a site owned by FL. Adjusted core NP should be Rmb815mn (-9% YoY), broadly in-line. Full-year dividend was Rmb0.05/sh (30% payout on core NP and an 8.5% yield).
Steady progress in balance sheet repair. Net gearing (on total equity) dropped to 53% (vs. 100% at end-1H13) on more contracted sales in 2H13 (63% of full-year sales). Debt maturity also improved, with long-term borrowings at 84%, up from 65% at end-1H13.
Unexciting sales growth expected in 2014. 2014 sales target is set at Rmb24bn (+16% YoY), backed by Rmb47.4bn saleable resources. Despite a mediocre growth trajectory, we expect FL's non-B share subsidiaries to gain critical mass in 2014 after snapping up four city-complex projects with total GFA of 1.8mn sqm during 2013.
Earnings forecast and valuation
We lift 2014e core NP by 1% to Rmb11.1bn and introduce 2015e core NP at Rmb12.8bn. Our new TP of HK$0.83 (from HK$0.93) is at an 80% target discount to end-2014e NAV of HK$4.15/sh, adjusted on lower ASP outlook in YRD.
Risks
Upside: Stronger-than-expected sales growth; higher proportion of finance costs being capitalized. Downside: Larger-than-expected price cuts in FL's core regions (Suzhou and Changzhou); tighter liquidity.