Investment positives
　　We initiate coverage with an OUTPERFORM rating and a target priceof HK$6.77(5.5x 2021e P/E, 53% NAV discount), offering 27% upside.
　　Why an OUTPERFORM rating?
A quality proxy of Yangtze River Delta (YRD). Staying rooted inthe region, Powerlong holds 76% of its Rmb385.8bn reserves inYRD. Its unique edge of acquiring complex projects has resultedin a land bank sufficient for around 4 years’ development, and afavorable margin (estimated gross profit margin of 32-33%).
　　Sales equaled Rmb60.4bn in 2019, a 3-year CAGR of 51%. Weexpect 25% sales growth per annum in the next 3 years.
Commercial property performance icing on the cake. Coreassets are community malls, with 45 currently in operation thatcontribute over 13% of the firm’s profit and approximately 24%of attributable gross asset value. We estimate Powerlong’s rentgenerated will total Rmb2.7bn in 2022e (a 3-year CAGR of 24%),given current organic growth and planned new openings. Thefirm started optimizing mall management capability in 2013. Webelieve the addition of Mr. CHEN Deli as new segment CEO willaccelerate the progress, likely bringing upside to our estimate.
Defensive value deserves additional credits. Powerlong has aproven record of active expansion and safe financials. Netgearing ratio was 84% and average funding cost was 6.45% atend-1H20. We think it will continue to balance developmentwith financial discipline in the next three years, even under thestrict practice of “3-4-5” regulations of developers’ financing,mainly owing to its abundant land reserves at hand.
　　How do we differ from the market?The market has underestimatedthe firm’s growth prospects, especially of commercial properties.
　　Potential catalysts: 2020-2021 results beat market consensus.
　　Financials and valuation
　　Our 2020-2021 EPS forecast is Rmb0.85 and Rmb1.09, a CAGR of29%. The firm is trading at 5.6x and 4.3x 2020e-2021e P/E and 63%NAV discount, a similar level to typical small-sized residentialproperty developers. We expect lucrative dividend yields of 7.1% and9.2% in 2020 and 2021. Risks: Deteriorated sell-through; unexpectedpolicy tightening; COVID-19 recurrence; failure to acquire sufficientnew projects.