yum cha 飲 茶 · china's monthly import of polysilicon (t) - lhs import price (us$/kg)...
TRANSCRIPT
Yum Cha 飲 茶 July 29, 2013
DIARY NOTES FOR THIS WEEK
July 29 Leading Index (Jun) [previous: 99.6]
August 1 Manufacturing PMI (Jul)
[previous: 50.1]
August 1 HSBC Manufacturing PMI (Jul)
[previous: 48.2]
August 3 Non-Manufacturing PMI (Jul)
[previous: 53.9]
August 5 HSBC Services PMI (Jul)
[previous: 51.3]
Source: Bloomberg
SOLAR SECTOR—Agreement between China and EU is favourable to Chinese
downstream players. We expect the Chinese government to impose an significant tariffs on the import polysilicon from EU, which will be unfavourable to GCL Poly. Comtec will likely a beneficiary given that it consumes mainly import polysilicon from OCI and Wacker.
CHINA CEMENT WEEKLY – Total railway fixed asset investment (FAI) is likely to be
revised up by 6% this year, according to Beijing News. In addition, total railway FAI during the 12th Five-Year Plan will also be lifted by RMB500bn to RMB3.3trn. These two measures will largely reduce the risk of a ―railway FAI cliff‖ and avoid a sharp fall in cement demand in 2014 and 2015. Meanwhile, we believe the new target list to close down obsolete capacity is likely to benefit CR Cement (1313.HK) and Anhui Conch (0914.HK) based on regional breakdown.
KAISA GROUP HOLDINGS [1638.HK; HK$1.71] —We initiate coverage of develop-
er Kaisa with a BUY recommendation, based on our view that the market has not yet given credit to the company for its constructive shift in strategy, from a focus on low-er-tier cities to a more balanced landbank. The company’s earnings visibility is clear through to 2014, and although debt has been increased to acquire additional tier-1 and tier-2 land, cash flows are strong, and the company has successfully re-financed its long-term debt, reducing borrowing costs and extending maturities. Trading at a deep discount to NAV, we see upside of >30% to our target price of HK$2.27.
INDICES Closing DoD%
Hang Seng Index 21,969.0
0.3
HSCEI 9,755.7
0.0
Shanghai COMP 2,010.9
(0.5)
Shenzhen COMP 960.0
(0.2)
Gold 1,330.0
(0.3)
BDIY 1,082.0
(0.9)
Crude Oil, WTI(US$/BBL) 104.6
(0.1)
Crude Oil, BRENT(US$/BBL) 107.2
0.1
HIBOR, 3-M 0.4
-
SHIBOR, 3-M 4.7
0.1
RMB/USD 6.13
(0.1)
Analyst: John Mulcahy, Managing Director, Research
CHART OF THE DAY— INDUSTRIAL PROFITS SLUMP, BUT SOME STIMULUS COMING
TALKING POINTS
Profits in the coal and non-ferrous metals sectors fell sharply in the first half of this year,
while profits in agriculture, food processing, textiles and autos surged, as overall industrial
profit growth slowed. It is clear that the Chinese government’s more proactive reform strat-
egy is gaining momentum, as the Ministry of Industry and Information Technology issued
instructions to 1,400 companies in 19 industries to reduce surplus production capacity. This
approach is the most extreme example yet of the different approach adopted by the current
leadership compared with the previous government. Excess capacity in sectors such as
steel, cement and paper have undermined profits in these sectors, and as our China Ce-
ment Weekly notes, the removal of excess capacity will benefit more efficient producers in
certain regions, helping companies such as CR Cement and Anhui Conch. Industrial com-
pany profits grew 6.3% year-on-year (YoY) in June, much slower than the YoY growth of
15.5% in May. The data for June are a rear-view mirror, and will have fed into the decisions
to reduce capacity, on the one hand, and on the other hand to boost spending on high-
speed rail in central and western provinces. By declaring a ―bottom line‖ for GDP growth of
7%, in effect Premier Li Keqiang is saying that measures will be taken to protect that level.
Industry Note
July 29, 2013
Wayne Fung, CFA— Analyst
(852) 3698-6319
John Mulcahy—Head of Research
(852) 3698-6889
Agreement Between China And EU Favourable to Chi-
nese Downstream Players
China’s Ministry of Commerce (MOFCOM) announced on July 27 that China’s Chamber of
Commerce for Import and Export of Machinery and Electronic Products (CCCME) and
four other industry associations have finally reached an agreement with the EU (source:
http://www.mofcom.gov.cn/article/ae/ai/201307/20130700218112.shtml). According to
Bloomberg news, the minimum export price of solar panels from China to EU is set at
EUR0.56/watt while the maximum export volume will be 7GW (for two years). We believe
the agreement is favourable to the Chinese downstream players given that the minimum
price is only 5% above the current module price. Despite a cap set on export volume, we
believe explosive Chinese demand will help offset the negative impact (China targets to
add 10GW of solar power installation per year between 2013 and 2015).
Importance of EU market will gradually reduce. Despite declining solar installa-
tions in Europe (down from 22.4GW in 2011 to 17GW in 2012), the European market
still accounted for 55% of global demand of 31.1GW in 2012, according to EPIA
(figure 1). While Europe has long been the major source of demand for Chinese solar
modules, a potential slowdown in Europe and a explosive growth in China will help
lower the trade impact on Chinese modules players in future, in our view.
What’s next? We believe MOFCOM will release the result of the import tariff for
EU polysilicon shortly. Given that an agreement has already been reached on the
solar panel side, we believe a potential tariff imposed by the Chinese government on
polysilicon imported from the EU will be much lower than that for the US (Tariff for the
US polysilicon ranged from 53.3% to 57%). We expect MOFCOM to announce a deci-
sion in the near future.
Impact on GCL Poly [3800.HK; HK$1.96] and Comtec [712.HK; HK$2.27]. We
believe the result of the trade dispute is positive news to most Chinese downstream
players. On the upstream side, however, the market previously expected the polysili-
con price to increase due to the launch of more import tariffs. We believe the potential
increase in the domestic polysilicon price will likely be constrained as we expect the
Chinese government to impose a significant tariff on imported polysilicon from EU,
which will be unfavourable to GCL Poly. On the contrary, Comtec will likely a benefi-
ciary given that it consumes mainly imported polysilicon from OCI and Wacker.
China Solar Sector
Note: MEA represents the Middle East and Africa
Sources: EPIA, CGIHK Research
Figure 1: Global Solar Annual Installation (MW)
Figure 2: China Polysilicon Import (Country Breakdown) Figure 3: China Polysilicon Import and Average Import Price
Sources: PVinsights, CGIHK Research
0
50
100
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300
0
1,000
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China's monthly import of polysilicon (t) - LHS Import price (US$/kg)
Sources: SiliconChina, China Customs, CGIHK Research
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
2010 2011 2012 5M13
Tonne
Others
US
Norway
Italy
Germany
Taiwan
Korea
Japan
Sources: SiliconChina, China Customs, CGIHK Research
Wafer price (US$/watt) Cell and module price (US$/watt)
Polysilicon price (US$/kg) Price spread (US$/Watt)
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
1/7
/200
9
1/1
0/2
00
9
1/1
/201
0
1/4
/201
0
1/7
/201
0
1/1
0/2
01
0
1/1
/201
1
1/4
/201
1
1/7
/201
1
1/1
0/2
01
1
1/1
/201
2
1/4
/201
2
1/7
/201
2
1/1
0/2
01
2
1/1
/201
3
1/4
/201
3
1/7
/201
3
Cell/wafer spread (US$/W) Module/cell spread (US$/W) Module/wafer spread (US$/W)
$10
$20
$30
$40
$50
$60
$70
$80
Polysilicon (US$/kg) - 1st grade
$0.3
$0.5
$0.7
$0.9
$1.1
$1.3
$1.5
$1.7
$1.9
$2.1
Module price (US$/W) Cell price (US$/W)
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
$0.70
$0.80
$0.90
$1.00
Wafer price (US$/Wp) (156mm multi) Wafer price (US$/Wp) (156mm mono)
Figure 4: Solar Pricing
China Cement Weekly
July 29, 2013
Wong Chi Man—Senior Analyst
(852) 3698-6317
John Mulcahy—Head of Research
(852) 3698-6889
Accelerated Railway FAI to Provide Down-side Protection to Cement Demand Railway investment to be revised up by 6% this year. The National Development and Re-
form Commission (NDRC) will raise total fixed asset investment (FAI) in railway projects this
year to RMB690bn (original target: RMB650bn), according to Beijing News. [Note: Beijing News
was the first newspaper to quote Premier Li Keqiang’s speech on 7% as the baseline of GDP
growth therefore we believe the source is reliable.]
Extra funding to smooth railway investment in 2014 and 2015. The news report also said
the total railway FAI in the 12th Five-Year Plan is raised by RMB500bn to RMB3.3trn. Based on
the original target, annual total railway FAI in 2014 and 2015 may drop to about RMB300bn to
RMB400bn. The risk of a ―railway FAI cliff‖ is largely reduced based on the new target, which
implies total railway FAI will be no less than RMB600bn per year in 2014 and 2015. Given that
infrastructure projects account for about one-third of cement consumption, it will avoid a sharp
fall in cement demand in the next two years.
New list to close down obsolete capacity: CR Cement and Anhui Conch to benefit most.
Separately, the Ministry of Industry and Information Technology (MIIT) released the target list
(first batch) to close down obsolete capacity for 2013, involving annual capacity of 93m tonnes.
Of this, Guangdong and Fujian accounted for 16.1% and 8.2%, respectively. For stocks under
our coverage, CR Cement is the major beneficiary with 27% cement capacity in Guangdong
and 13% in Fujian at end-2012. It is also positive to Anhui Conch, with about 6% of its clinker
capacity in Guangdong last year.
Follow-up on funding cost. We discussed last week the higher cost of bond refinancing.
BBMG is the latest victim of the ―cash crunch‖, which priced its short-term commercial paper at
5.2% on 24 July, representing an increase of 93bps compared with the issue in March. We will
closely monitor market bond yields and revise our forecasts if tight market liquidity lingers.
Cement stocks under our coverage up 6.8% last week. Premier Li’s positive tone on railway
construction supported share prices. BBMG was the leader last week, surging 9.8%. Average
cement price on a nation-wide basis was largely flat last week. Major price changes: southern
Zhejiang +RMB20-30/tonne (+ve CNBM); Guangxi +RMB10-20/tonne (+ve CR Cement, Anhui
Conch); Jiangxi (Nanchang) - RMB30/tonne (low-grade) (-ve Anhui Conch, CNBM). Please
refer to the price charts in the following pages.
China Cement Sector
Sources: Company, Bloomberg, CGIHK Research estimates
Valuation Table
Market cap
Company Ticker Rating Price (HK$) (US$m) 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E
Anhui Conch 914 HK Equity BUY 23.75 13,714 16.3 12.8 10.6 2.1 1.8 1.6 9.7 8.0 6.8
CNBM 3323 HK Equity HOLD 7.42 5,136 6.0 5.0 4.1 1.1 0.9 0.7 8.7 6.7 5.7
BBMG 2009 HK Equity BUY 5.01 3,241 8.2 8.3 6.9 0.8 0.7 0.6 8.2 7.9 6.7
CR Cement 1313 HK Equity HOLD 4.36 3,644 12.2 11.2 9.4 1.3 1.2 1.1 9.0 7.8 6.7
Shanshui Cement 691 HK Equity HOLD 3.22 1,162 4.9 6.2 5.4 0.9 0.8 0.7 5.0 5.2 4.6
TCC International 1136 equity NR 2.04 862 13.0 5.9 5.0 0.4 0.4 0.4 9.0 6.2 5.6
China National Materials 1893 equity NR 1.71 783 10.2 8.1 6.5 0.4 0.4 0.4 7.3 6.2 5.5
Asia Cement 743 equity NR 3.63 724 11.2 6.0 4.7 0.5 0.5 0.4 6.6 4.7 4.0
West China Cement 2233 equity NR 1.15 670 11.0 6.8 5.5 0.9 0.8 0.7 7.3 5.7 4.9
Tianrui Cement 1252 equity NR 2.18 671 5.2 4.5 4.0 0.7 0.6 0.5 6.1 5.2 4.8
Simple average 9.8 7.5 6.2 0.9 0.8 0.7 7.7 6.3 5.5
Weighted average 12.1 9.8 8.1 1.5 1.3 1.1 8.8 7.3 6.3
PER (x) PBR (x) EV/EBITDA(x)
Figure 1: Source of funding of total railway FAI (2013) (Unit: RMB bn; Total RMB690bn)
Vehicle purchase
tax, 15
Direct financing by China Railway Corporation, 23
Local governments and
others, 90
Bonds, 150Bank loans, 317
SOEs, 30
Railway construction
fund, 45
From NDRC budget, 20
Source: Beijing News
Capacity (m tonnes) % of total
Tianjin 2.02 2.2%
Hebei 7.40 8.0%
Shanxi 3.50 3.8%
Inner Mongolia 4.11 4.4%
Liaoning 0.75 0.8%
Jilin 0.50 0.5%
Heilongjiang 0.10 0.1%
Jiangsu 2.32 2.5%
Zhejiang 0.12 0.1%
Anhui 0.58 0.6%
Fujian 7.64 8.2%
Jiangxi 2.85 3.1%
Shandong 6.75 7.3%
Henan 1.24 1.3%
Hubei 0.88 0.9%
Hunan 5.70 6.1%
Guangdong 14.98 16.1%
Guangxi 4.50 4.8%
Chongqing 2.01 2.2%
Sichuan 6.99 7.5%
Guizhou 7.01 7.5%
Yunnan 1.01 1.1%
Shaanxi 2.02 2.2%
Gansu 3.66 3.9%
Qinghai 0.10 0.1%
Ningxia 0.20 0.2%
Xinjiang 3.72 4.0%
Tibet 0.20 0.2%
Total 92.85
Figure 2: Obsolete Cement Capacity to be Closed Down in 2013 (Kilns and grinding mills)
Source: MIIT (first batch)
Figure 3: Regional Cement Price
Sources: Digital Cement, CGIHK Research
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Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
National Average (P.O 42.5)
2010 2011 2012 2013
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370
390
410
430
Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
North China
2010 2011 2012 2013
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500
Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
Northeast China
2010 2011 2012 2013
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450
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550
Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
East China
2010 2011 2012 2013
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Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
South Central China
2010 2011 2012 2013
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Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
Southwest China
2010 2011 2012 2013
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450
Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
Northwest China
2010 2011 2012 2013
BUY
Close: 1.71 (July 26, 2013)
Target Price: 2.27
Price Performance
Market Cap US$1,129m
Shares Outstanding 5,525m
Auditor PWC
Free Float 30.9%
52W range HK$1.32-2.87
3M average daily T/O US$2.5m
Major Shareholding Kwok’s family
(62.4%)
Source: Company, Bloomberg
Frank Miao —Senior Analyst
(852) 3698-6320
John Mulcahy—Head of Research
(852) 3698 6889
Kaisa Group Holdings Ltd
July 29, 2013
Kaisa Group Holdings Ltd [1638.HK]
Improving fundamentals call for richer valuation
We see high earnings visibility for Kaisa into 2014E, based on its current unrec-
ognized revenue and strong sales in 1H13. The company’s effort to increase its pres-
ence in first- and second-tier cities should gradually change the current market per-
ception of it being a low-tier city developer. Kaisa’s recent land acquisitions stirred
market concerns as it will temporarily push up interim net gearing. However, we ex-
pect net gearing to decrease by year-end 2013 and believe Kaisa’s diverse debt
composition and maturity profile translates into a stable balance sheet.
We see a high probability of Kaisa achieving, and possibly beating its full-year
sales target. Any better-than-expected monthly sales performance could trigger
an upward adjustment in sales target and/or upward revision of the consensus
earnings forecast, prompting a re-rating.
Kaisa started restructuring its landbank in 2012 with a re-focus on first-and se-
cond-tier cities. This effort has begun to yield results, and we believe it should
mitigate market’s perception of it being exclusively a low-tier city developer.
We believe the market’s concern over Kaisa’s land acquisitions (RMB8.6bn) in
1H13 is overdone. In spite of a climbing net gearing ratio, Kaisa has a diverse
mix of domestic and offshore debt, and a balance of maturities that we believe is
manageable given its cash flow and sales prospects.
We initiate coverage on Kaisa with a BUY rating and a target price (TP) of HK$2.27,
based on 50% discount to our estimated FY13E Net Asset Value (NAV) of HK$ 4.54
and represents 4.2x FY13E PER. Kaisa’s current share price implies 3.1x FY13E
PER (versus historical average of 7.2x and peer average of 4.4X) and 62% discount
to our estimated NAV. The low valuation—with ~33% upside to our TP of $2.27—
Source: Company data, CGIHK Research
Key financials FY2011 FY2012 FY2013E FY2014E FY2015E
Revenue (RMB m) 10,835 11,955 16,161 20,925 28,231
Revenue growth 40% 10% 35% 29% 35%
Core net profit (RMB m) 1,467 1,762 2,381 3,256 4,461
Core net profit growth 7% 17% 39% 37% 37%
Fully diluted core EPS (RMB) 0.3 0.3 0.4 0.6 0.8
Price to earning (x) 5.2 4.4 3.1 2.3 1.7
Net gearing 77% 67% 76% 59% 42%
EBIT interest coverage (x) 1.8 1.5 2.1 3.0 4.3
Cash interest coverage (x) 3.1 2.9 3.4 3.8 4.8
0
100
200
300
400
500
600
0
0.5
1
1.5
2
2.5
3
3.5
4
Financials and ratios: FY2011 - FY2015E
Source: Company data, CGIHK Research
Profit & loss (RMB m) FY2011 FY2012 FY2013E FY2014E FY2015E Cash flow statement (RMB m) FY2011 FY2012 FY2013E FY2014E FY2015E
Revenue 10,835 11,955 16,161 20,925 28,231 PBT 2,825 3,269 3,604 6,008 7,355
Property development 10,576 11,598 15,778 20,433 27,568 Adjustments for
Property investment 151 220 232 326 480 Finance Cost 69 39 133 172 194
Property management services 108 137 151 166 183 Fank interest income (21) (22) (65) (79) (94)
COGS (7,601) (8,070) (10,593) (13,639) (18,350) Fair value gains (433) (501) - (1,178) (435)
Gross profit 3,234 3,885 5,568 7,285 9,881 Depreciation 31 43 - - -
Other income and expenses 43 24 24 24 24 Share of results of associates/JCEs 1 (242) - - -
Selling expenses (405) (578) (810) (1,006) (1,217) Gain on disposal 2 (54) - - -
Administrative expenses (565) (818) (1,111) (1,380) (1,669) Share buy back/issuance 51 57 - - -
EBIT 2,307 2,513 3,671 4,923 7,020 Impairment loss - 41 - - -
Finance expenses (48) (17) (68) (93) (100) Other (exchange (112) (28) - - -
Interest income 21 22 65 79 94 Operating cashflows before movements in WC 2,413 2,602 3,671 4,923 7,020
Interest captilized 1,210 1,603 1,598 1,460 1,438 Increase in inventory of properties (6,577) (9,667) (13,446) (10,270) (8,115)
Total borrowing cost (1,280) (1,642) (1,730) (1,632) (1,632) increase in properites for development (Land) (1,089) (693) - - -
Revaluation gains from Investment property 433 501 - 1,178 435 increase in properties under development (5,488) (8,973) (13,446) (10,270) (8,115)
Other gains 134 272 - - - (Increase) in receivables and deposites (1,205) (1,873) (245) (1,812) (2,607)
Pre-tax profit 2,825 3,269 3,604 6,008 7,355 Increase in presale deposit 2,748 10,002 5,682 6,196 5,896
Tax (926) (1,153) (1,077) (1,718) (2,307) increase in trade and other payables 455 264 2,585 2,858 1,561
Reported net income 1,899 2,116 2,526 4,289 5,048 Increase in tax payable - - 370 463 578
Attributable to equity holder of 1,901 2,072 2,381 4,139 4,787 Restricted cash (11) (129) - - -
Minority interests (2) 44 (145) (150) (260) Increase in other working capitals (34) 448 - - -
Deduction of post-tax gains (431) (398) - (884) (326) Cash used in operations (2,211) 1,649 (1,382) 2,358 4,333
Core earning 1,467 1,762 2,381 3,256 4,461 Corporate Tax paid (743) (906) (1,077) (1,718) (2,307)
Interest paid (1,096) (1,468) 119 (37) (124)
Basic EPS - core (RMB) 0.30 0.35 0.49 0.66 0.91 Net cash used in operating activities (4,050) (725) (2,341) 603 1,902
Diluted EPS - core (RMB) 0.26 0.32 0.43 0.59 0.81 Purchase of PPE (70) (73) (41) (47) (53)
DPS - - - - - Purchase of Land use right - - - - -
Proceeds from Disposal of PPE 0 0 - - -
Balance sheet (RMB m) FY2011 FY2012 FY2013E FY2014E FY2015E Investments in Associates/JCEs - 442 - - -
Stocks of inventory 23,502 34,840 48,286 58,556 66,671 Addition to investment properties (473) (531) - - -
Completed properties Held for Sale 1,343 3,170 4,452 5,165 4,789 Acquisition of subsidiaries (1,469) (1,017) - - -
Properties under development 22,160 31,670 43,833 53,391 61,882 Others (repurchase of notes etcs) (11) - (134) (94) (145)
Prepayment, Deposit and other recievable 6,613 9,452 9,696 11,509 14,116 Interest received 21 22 65 79 94
Income tax recoverable 154 192 323 418 565 Net cash from investing activities (2,002) (1,157) (110) (62) (104)
Restricted deposits 541 670 670 670 670 Free cash flow after investment (6,052) (1,883) (2,451) 542 1,798
Bank deposits and cash 3,945 4,683 5,890 6,260 7,864 Proceeds from issuing shares and expenses 1 1 - - -
Total current assets 34,756 49,836 64,865 77,412 89,885 Disposals - 966 - - -
Interest paid - - (133) (172) (194)
Investment properties 6,375 7,540 7,540 8,718 9,152 Proceeds from borrowing 9,345 5,216 3,791 - -
PPE 149 308 349 396 448 Repayments of borrowings (3,634) (3,533) - - -
Interest in Subsidiaries - - - - - Capital contribution fromto minority shareholders 0 (30) - - -
Interest in assocates 299 - - - - Net cash from financing activities 5,712 2,619 3,658 (172) (194)
Defered Taxation 209 90 127 251 -
Land Use Right 21 60 60 60 60 Net Increase in cash and cash equivalents (340) 736 1,208 369 1,604
Total non-current assets 6,949 8,117 8,039 9,300 9,912 Cash and cash equivalents at 1 Jan 4,340 3,945 4,683 5,890 6,260
Effect of Forex (54) 1 - - -
Short term borrowings 2,067 3,150 3,150 3,150 3,150 Cash and cash equialents at 31 December 3,945 4,683 5,890 6,260 7,864
Presales deposit 7,242 17,244 22,926 29,122 35,018
Trade and other payable 6,797 7,112 9,696 12,555 14,116 Key ratios FY2011 FY2012 FY2013E FY2014E FY2015E
Taxation payable 989 1,481 1,851 2,314 2,892 Revenue Growth (YoY) 39.7% 10.3% 35.2% 29.5% 34.9%
Amount due to related companies 3 452 452 452 452 Core net profit growth (YoY) 6.5% 17.0% 38.6% 36.7% 37.0%
Total current Liability 17,657 20,397 26,790 29,819 34,256 Gross margin 29.8% 32.5% 34.5% 34.8% 35.0%
Core net profit margin 13.5% 14.7% 14.7% 15.6% 15.8%
Interest-bearing loans 11,577 12,257 16,048 16,048 16,048 PER (x) 5.2 4.4 3.1 2.3 1.7
Other - 59 59 59 59 PBR (x) 0.6 0.5 0.4 0.4 0.3
Deferred tax liabilities 1,079 1,143 1,143 1,143 1,143 Dividend yield n.a n.a n.a n.a n.a
Total non-current liabilities 12,657 12,657 12,657 12,657 12,657 ROA - core 3.5% 3.0% 3.3% 3.8% 4.5%
ROE - core 13.4% 13.1% 14.6% 16.5% 18.3%
Equity
Share capital 432 432 432 432 432 Net gearing 76.6% 67.2% 75.9% 59.1% 41.8%
Share premium 3,817 3,818 3,815 3,817 3,818 Net debt to total asset 22.0% 17.4% 17.3% 14.1% 10.7%
Reserves 7,693 10,100 10,100 10,100 10,100 Total debt to total asset 32.7% 26.6% 26.3% 22.1% 19.2%
Retained earnings/(accumulated losses) - - - - - EBITD interest coverage 1.8 1.5 2.1 3.0 4.3
Attributable Equity 11,942 14,350 16,729 20,870 25,658 Cash interest coverage 3.1 2.9 3.4 3.8 4.8
Minority interests 8 704 849 999 1,259 ST debt as % of total debt 15% 20% 16% 16% 16%
Total equity 11,949 15,054 17,578 21,869 26,918 Overall financing costs 11.9% 11.3% 10.0% 8.5% 8.5%
Historical share price underperformance—why?
Share price underperformance: Kaisa Group (Kaisa) grew contracted sales by
72% from Rmb10.1bn in 2010, its first full year of operation after public listing in
December 2009, to Rmb17.2bn in 2012, beating industry average of 43% and
national residential property sales growth of 21% during the same period. Kaisa is
also one of the few companies that have consistently met contracted sales targets,
even in rough years such as in 2011.
Kaisa’s new growth trajectory not yet
appreciated...
Figure 2: 2011 Contracted sales target hit rate by major developers
Source: Company data, CGIHK Research
Figure 1: Contracted sales growth versus share price movement, 2010 to date
Source: Company data, Bloomberg, CGIHK Research
120%115%
109%
107%
103%
101%
100%96%
90%
89% 88% 85%84%77%
73%69%
45%
0%
20%
40%
60%
80%
100%
120%
140%
(40)
(20)
-
20
40
60
80
100
Over/under achievement (LHS, RMB bn)Sales target (LHS, RMB bn)Target hit rate (RHS)
-80%
-60%
-40%
-20%
0%
20%
40%
60%
-50% 0% 50% 100% 150% 200% 250% 300% 350%
Sh
are
pric
e m
ove
me
nt 2
01
0 to
da
te Glorious
Sunac
CR Land
COLI
Country Garden
Shimao
Longfor
Greentown
YuexiuEvergrande
Kaisa
Sino Ocean Land
C C Land
Agile
GZ R&F
KWG Property
Contracted sales growth FY10 - FY12
Poor historical performance has left
Kaisa deeply undervalued
In spite of the above-average sales growth and consistent track record, Kaisa’s
share price declined by 41% from 2010 and 29% year-to-date (YTD) 2013, making
it one of the worst performers among comparable peers with similar market capi-
talization and/or business focus. Kaisa’s current FY13e PER of 3.1x, versus his-
torical average of 7.2x and peer average of 4.4x, also suggests market’s current
under-appreciation of the company’s shares, in our view.
Figure 3: Historical share price underperformance
Source: Bloomberg, CGIHK Research
*Note: Sunac listed in October 2010
Since Kaisa Poly Sunac* KWG Evergrande Yuexiu SZ Investment Average
2010 -41% -59% 51% -27% -25% -13% -13% -18%
2013 -29% -34% -15% -27% -27% -22% -16% -24%
2010 trough 27% 81% 325% 81% 65% 98% 122% 114%
2010 peak -51% -66% -29% -41% -48% -33% -32% -43%
2013 trough 8% 3% 13% 13% 11% 8% 7% 9%
2013 peak -40% -41% -29% -35% -33% -33% -32% -35%
Figure 4: Share performance for comparable peers Figure 5: FY13E PER comparasion
Source: Bloomberg, CGIHK Research Source: CapitalIQ, CGIHK Research
-30%
20%
70%
120%
170%
220%
Ja
n-1
0
Mar-
10
May-1
0
Ju
l-10
Sep
-10
No
v-1
0
Ja
n-1
1
Mar-
11
May-1
1
Ju
l-11
Sep
-11
No
v-1
1
Ja
n-1
2
Mar-
12
May-1
2
Ju
l-12
Sep
-12
No
v-1
2
Ja
n-1
3
Mar-
13
May-1
3
Ju
l-13
Kaisa Poly
Sunac KWG
Evergrande SZ Investment
Yuexiu
6.0 5.8
4.3 4.2 3.9
3.6
3.1
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
SZ INV Yuexiu Poly KWG Evergrande Sunac Kaisa
Methodology, valuation, and risks
Property developers becoming space
manufacturers, and PER worth con-
sidering, but…
...NAV still key metric, and Kaisa trad-
ing at 62% discount
At our target price of $2.27 discount to
NAV still comfortable 50%
Real estate developers in China are becoming more focused on volume churning
and thus similar to mass manufacturers. Consequently, price/earnings ratio (PER)
has become an increasingly relevant valuation basis. However, due to the current
disconnection between pre-sales cash-flows and revenue recognition, PER does
not reflect actual cash flow dynamics and is highly sensitive to project completion.
As such, we adopt price vs. estimated net asset value (NAV) as our primary valua-
tion methodology, and cross-check with PER.
Our built-in property price growth assumptions for 2013F to 2015F are 4%, 9%,
and 6%, respectively. We use a weighted average cost of capital of 12.1% for Kai-
sa, based on a risk-free rate of 6%, required market return of 11%, adjusted beta
of 1.9, and long-term equity to total asset assumption of 63%.
Kaisa is currently trading at 62% discount to NAV and 3.1 FY13E PER. The low
valuation reflects the market’s under-appreciation of the company’s improving
fundamentals, in our view.
We initiate coverage on Kaisa with a BUY rating and a price target of HK$2.27,
based on 50% discount to our estimated NAV of HK$4.54/share, implying 33%
upside. Our target prices represent 4.2/FY13F EPS of RMB0.43/share. A 5% and
10% increase/decrease in our property price growth assumption in FY13 could
result in changed target prices implying 62% and 91% upside and 3% upside and
26% downside to current price. Key risks to our estimates are 1) unexpected tight-
ening policies 2) overall economic condition and 3) execution risks.
Figure 23: 12 month rolling forward PER Figure 24: 12 month rolling forward PBR
Source: Company data, Bloomberg, CGIHK Research Source: Company data, Bloomberg, CGIHK Research
0.0
5.0
10.0
15.0
20.0
25.0
30.0
De
c-0
9
Feb
-10
Apr-
10
Ju
n-1
0
Aug
-10
Oct-
10
De
c-1
0
Feb
-11
Apr-
11
Ju
n-1
1
Aug
-11
Oct-
11
De
c-1
1
Feb
-12
Apr-
12
Ju
n-1
2
Aug
-12
Oct-
12
De
c-1
2
Feb
-13
Apr-
13
Ju
n-1
3
PER
Average
+1 STD
-1 STD
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
De
c-0
9
Feb
-10
Apr-
10
Ju
n-1
0
Aug
-10
Oct-
10
De
c-1
0
Feb
-11
Apr-
11
Ju
n-1
1
Aug
-11
Oct-
11
De
c-1
1
Feb
-12
Apr-
12
Ju
n-1
2
Aug
-12
Oct-
12
De
c-1
2
Feb
-13
Apr-
13
Ju
n-1
3
BPR
Average
+1 STD
-1 STD
NAV breakdown
Figure 25: NAV breakdown
Source: Company data, CGIHK Research
Economic Residential NAV Value per % of PRC Investment NAV Value per % of
Region Development Rmb m Share (Rmb) GAV Properties Rmb m Share (Rmb) GAV
Northern China 5,341 1.1 16% Office 4,500 0.9 13%
Northern China Anshan 1,800 0.4 5% Retail - - 0%
Northern China Benxi 185 0.0 1% Hotel - - 0%
Northern China Dandong 306 0.1 1% Carpark - - 0%
Northern China Huludao 630 0.1 2% Other - - 0%
Northern China Liaoyang 98 0.0 0% Total 4,500 0.9 13%
Northern China Panjin 74 0.0 0%
Northern China Qingdao 653 0.1 2% Gross property asset 33,546 6.8
Northern China Shenyang 468 0.1 1% Investment at cost - -
Northern China Weifang 68 0.0 0% Gross asset value (Rmb) 33,546 6.8
Northern China Yingkou 1,058 0.2 3%
Central and West 4,228 0.9 13% Gross asset value (HK$) 41,932 8.5
Central and West Changsha 1,023 0.2 3% Less Land cost (HK$) - -
Central and West Chengdu 898 0.2 3% Less Net debt (HK$) (15,809) (3.2)
Central and West Chongqing 205 0.0 1% Less MSHI (HK$) (1,057) (0.2)
Central and West Nanchong 878 0.2 3% Net Asset Value 25,067
Central and West Wuhan 1,137 0.2 3% Share outstanding (m shares) 5,525
Central and West Zhuzhou 86 0.0 0% Net Asset Value per share (HK$) 4.54
YRD 5,207 1.1 16% Discount to NAV 50%
YRD Changzhou 333 0.1 1% Target price 2.27
YRD Hangzhou 1,903 0.4 6%
YRD Jiangyin 1,667 0.3 5%
YRD Shanghai 1,235 0.2 4%
YRD Taizhou 69 0.0 0%
PRD 14,270 2.9 43%
PRD Dongguan 2,050 0.4 6%
PRD Foshan 413 0.1 1%
PRD Guangzhou 2,241 0.5 7%
PRD Huizhou 1,808 0.4 5%
PRD Shenzhen 6,959 1.4 21%
PRD Zhuhai 800 0.2 2%
Development GAV 29,046 5.9
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