Upgrade to BUY, Time To Revisit The Counter
We upgrade Evergrande to BUY （from Neutral） with a new HKD31.70 TP（from HKD30.50, 26% upside）， based on a narrowed 25% discount （from30%） to end-FY18F ENAV of HKD42.20 （from HKD43.50）。 This is as we seeemerging investment merits, including a visible deleveraging trajectory tocatalyse a shareholding buyback and/or dividend programme in FY19-20,improving profitability, and upbeat earnings momentum. The sluggishYTD share price movement also offers opportunity to accumulate thecounter, in our view.
FY17 results in line. China Evergrande Group （Evergrande） reported in lineearnings with 437.2% YoY growth. This was in line with our estimate but 17.8%lower than consensus. The earnings growth was mainly driven by higher salesbookings and GPMs. Net gearing （including perpetual securities as debt）declined to 183.7% （1H17: 240%）， while weighted average financing costsdeclined to 8.1% （FY16: 8.3%）。
Visible deleveraging – an additional catalyst to unlock value. On the backof management’s pledge to downsize its landbank by 5% pa, we anticipateEvergrande reducing its net gearing to 51% in FY20 and consecutive operatingcash inflows during FY18-20. In our view, this should allow capital deploymentfor a significant share buyback and/or dividend programme after servicing itsdebt obligations from FY18 onwards – pending the approval of the backdoorlisting of its real estate development business on the Shenzhen StockExchange （SZSE）。
Improving profitability, where we expect Evergrande’s NPMs to maintain at8.4-9.4% （FY16-17: 2.3-8.3%）。 The improved NPM expectations were mainlyunderpinned by the company’s new strategic initiative to normalise its salesvolume growth for better pricing. In FY18-20, we anticipate Evergrande’scontracted ASP to rise 13%, 8% and 5% YoY respectively.
Solid contracted sales growth despite more aggressive pricing at a 15-20% CAGR over FY17-20F. This should allow Evergrande to maintain itsleading position in terms of attributable contracted sales （excluding propertysales of its JVs and associates） and a Top 3 position in terms of total contractedsales （including property sales of its JVs and associates）。 Coupled with betterthan-expected profitability and a steady completion pipeline, we anticipateupbeat earnings momentum for the company, where we expect its FY18-20recurring net profit to grow at 43%, 28% and 11% respectively.
Upgrade to BUY （from Neutral） with a new HKD31.70 TP （from HKD30.50,26% upside）。 Given Evergrande’s strong earnings momentum and upbeatprofitability, we view a lower 25% discount as justified. Meanwhile, we lower ourend-FY18F ENAV to HKD42.20, mainly factoring in the smaller landbank –down 5% pa as per management’s guidance. Downside risks to our call areslower-than-expected deleveraging and longer-than-expected delays in thebackdoor listing of its real estate business on the SZSE.