Sales to accelerate in 2018F; maintaining Buy due to low valuation
We maintain Buy and raise target price by 3.6% to HKD4.57 after factoring instronger sales （2017-18F sales up 1-3%）， higher earnings （FY17-19F earningsup 1-3%） driven by gross margin expansion （30-31% vs. 25.0% in FY16）， latestland acquisitions, and dilution from the placement done on 31 Aug. We believesales for China SCE will remain good in Nov-Dec, and may even accelerate in2018F, given its rich total saleable resources of ~RMB140bn. Current valuationat 4.5x FY18F P/E and 58% discount to the NAV is much lower than peers, andthe chairman’s recent stake increase at the average price of HKD3.47/shareshould offer good support against potential downside.
Full-year sales to beat target; further sales acceleration in 2018F via aggressiveland banking
We expect China SCE to achieve RMB31.3bn of sales this year （+33% y-y, 12%higher than its target）， given there are ~RMB7.5bn of new projects to belaunched in Nov-Dec, and it had reached RMB25.5bn by October. Also, thecompany has aggressively acquired 4.4mn sqm GFA YTD （vs. 1.4mn sqm GFAsold in 10M17）， which we estimate can add RMB63bn of saleable resources toits land bank to further accelerate its sales growth in 2018F to reachRMB43.1bn （+38% y-y, vs. 30% CAGR over the past three years）。
30% earnings CAGR implies cheap valuation and 5-8% yield
Driven by its strong sales growth （+62%/+33% in 2016-17F）， we expect ChinaSCE to deliver 30% earnings CAGR to RMB1.8bn/RMB2.5bn/RMB3.1bn withgross margin expansion of 30-31% in FY17-19F, considering there were~RMB26.5bn of unbooked sales by October. This implies only 4.5x FY18F P/Eand 5-8% dividend yield （based on 30% payout ratio）， which is much lowerthan the sector average of 7.4x.
Shareholding increase by chairman good protection against downsideChairman Wong has acquired 6mn shares for HKD20.8mn （latest purchaseprice of HKD3.48/share） this week to increase his stake to 52.03%, after theshare price corrected by 13% and dropped below the placement price ofHKD3.64 on 31 Aug. We believe Chairman Wong will continue to raise hisshareholding, which should act as a good support against potential downside.
Valuation and risks
Our TP is based on a 45% discount to the end-FY18F NAV of HKD8.32. Thestock now trades at 4.5x FY18F P/E and at a 58% discount to the NAV. Keyrisks include weaker-than-expected sales growth, slower margin recovery, andhigher net gearing due to unwise land acquisitions. See pg 3