What's new
KWG held a reverse roadshow on December 3, 2019.
Comments
We expect sustainable sales growth at KWG. We think the firm willsafely achieve its 2019 sales target of Rmb85bn （+30% YoY）。 Weproject Rmb190–200bn of total saleable resources in 2020 to deliversales of around Rmb110bn （+30% YoY）。 We think potential inclusionof three en-bloc offices and over HK$20bn of resources in Hong Kongcould lend support to product supply in 2020.
Earnings could see stable release. We estimate core net profit ofRmb4.9bn in 2019 （+30% YoY） and Rmb6.3bn in 2020 （+26.5% YoY），and the firm may continue to achieve solid growth of around 25% in2021. Attributable unbooked sales amounted to Rmb54bn atend-1H19 with solid GPM of 30–35%. GPM from YTD sales remainsabove 30% as extra support. Moreover, we think KWG is optimizingits internal management of project delivery to enhance visibility inrevenue booking （especially from associates and JVs）。
Active layout in alternative lines. The firm has an investmentproperty portfolio that includes 29 assets under operation and over15 in pipeline. We think KWG might spin off its property managementarm in 2020. We estimate GFA-managed of around 10mn sqm atend-2019, with a decent allocation （20–30%） in non-residentialproperties. We expect net profit of roughly Rmb150mn from propertymanagement in 2019.
Solid financials. Cash on hand provided 4.8x coverage to short-termdebt at end-1H19. YTD land acquisition cost is 40% of sales. As such,we think net gearing ratio could trend down from 1H19 （77%）。
Valuation and recommendation
We raise 2019 and 2020 earnings by 4% and 1% to Rmb4.9bn （+30%YoY） and Rmb6.3bn （+26.5% YoY）。 We maintain OUTPERFORM andlift TP 26% to HK$11.0 （5x 2020e P/E, 40% NAV discount, 20%upside） on improved visibility in growth prospects. The firm iscurrently trading at 5.3x/4.2x 2019e/2020e P/E and 50% NAVdiscount.
Risks
2019 sales and earnings fall below our expectations.