Key Factors for Rating
FL revised up its contracted sales target by 30% to RMB 52bn. It posted salesof RMB28bn in 1H16, representing 53.9% of the new target (up 144% YoY).
The rise in gross margin was due to more bookings from Shanghai, Suzhou andHangzhou projects. With greater contributions from mixed-use projects whosegross margins are typically higher, we reckon FL will see margins trend up, andwe estimate its full-year 2016 gross margin in the 22-25% range.
The company issued RMB3bn in domestic private notes, whose funding costsrange from 4.7% to 5.4% (lower than the 2015 private notes at 6%). We seeFL’s overall finance cost down to 6.5% at end-2016 vs. 7.2% in 2015.
FL’s net gearing surged 11.8ppts to 83.8% in 1H16, due to the substantial landacquisitions in 1H16 (total land cost of RMB7.55bn with the majority paid in1H16). Supported by more cash collection in 2H16, we expect its gearing toreturn to the <80% level at end-2016.
Key Risks to Rating
Downside: FL may face greater market uncertainty in some overheated cities(i.e. Suzhou & Nanjing) where it made material land acquisitions in 1H16. Hugestakes in higher-tier cities may also expose FL to larger policy risk.
Upside: higher-than-expected contracted sales growth.
Valuation
We lift our 2016E NAV by 8.5% to HK$3.66/share and raise our TP to HK$1.28to reflect the outstanding sales growth. The stock currently trades at a 67%discount to our 2016E NAV and at 0.6x 2016E P/B. We deem it fair and reaffirmHOLD.