Orient Securities (Hong Kong) Limited Please read the analyst certification, company disclosure and disclaimer in the last page 1
China New Town Development
中国新城镇 (1278 HK)
Time for profit taking
Share price of China New Town Development (“CNTD”) has up ~60% since our
initiation. CNTD announced to delist from SGX and cooperate with Vanke to
develop a new town project in Beijing. To delist from SGX allows the Company to
concentrate its activities in Hong Kong. And cooperation with Vanke will create
endorsement effect to CNTD, and hence the publicity amid the market. We revise
up our fair value estimation for CNTD and revise up our target price to HK$0.37.
However, we believe most of the positive factors have been factored in. We think
investor can take profit at this price level, and change our rating to “HOLD”.
Delisting from SGX. CNTD will delist from Singapore Exchange (SGX). This delisting is not a privatization exercise, and the Company intends to maintain listing position in Hong Kong. In our view, although there is no significant change on fundamental, delisting in SGX eliminate the diversion effect of trading activities from the two stock exchanges. It will bring a better liquidity to the shares, and hence benefit to the Company by lowering the liquidity risk for its shareholders.
Synergy from working with the big name.The Company announced to establish a JV company with the largest property developer – Vanke for a new project located in Beijing. The Project is located 7km from Zhongguancun (中关村). Considering with the geographic advantage from Zhongguancun, we believe the phase 1 project will mainly focus on commercial property for technology industry. The total size of the project is over 4m sqm, we believe it will be the mid-to-long term growth driver for the Company.
Not much P&L effect in short term. The delisting from SGX will not bring significant fundamental change to CNTD, and the new development project in Beijing takes 3-5 years to build. Therefore we don’t believe it will create important P&L effect to the Company in FY16-18E. Nevertheless the two big actions reflect the management tries to maximize shareholders’ benefit not only from business development side, but also considering the market activities.
Time to take profit. We revise up the net income projection for FY17-18E by 52% mainly due to upward adjustment on our forecast of land sales amount and ASP for CNTD in FY17-18E under the strong demand for new lands in Shanghai. We also increase our fair value estimation due to the intake of Beijing project. Based on our DCF model, our new target price is HK$0.37 (up from HK$0.31). However, the share price has been up ~60% since our initiation. We believe most of the positive factors have been factored in. We think it is a good time for profit taking and change our rating to “HOLD”.Investment Summary
FY-end Dec 2014 2015 2016E 2017E 2018E
Revenue (RMBmn) 93 203 227 872 987 Chg (%) (85.2) 118.0 12.0 283.5 13.1 Net income (RMBmn) (61) 65 393 228 319 Chg (%) (71.2) 502.8 (42.0) 40.1 EPS (RMBcent) (0.6) 0.7 4.0 2.5 3.5 Chg (%) 502.8 (38.0) 40.1 Core P/E (x) - 51.7 8.6 13.8 9.9 P/B (x) 1.0 0.9 0.9 0.8 0.8 EV/EBITDA (x) 246.7 20.1 6.1 8.4 6.6 DPS (RMBcent) - - - 0.3 0.4 Yield (%) - - - 0.8 1.1
Source: Company data, Orient Securities (Hong Kong)
HOLD
Share Price
Target Price
HK$0.40
HK$0.37
China / Real Estate / Property 7 November 2016
Steve Wong
(852) 3519 1292
steve.wong@dfzq.com.hk
Latest Key Data
Total shares outstanding (mn) 9,846 Market capitalization (HK$mn) 3,938 Enterprise value (HK$mn) 3,777 12M daily turnover (HK$mn) 0.7
12M volatility (%) 49.8
RoE avg FY15-17E (%) 6
P/B FY16E (x) 0.9
Net debt/equity FY16E (%) 13
Performance (%)
1M YTD 12M
Absolute 13 34 28
Relative to HSI 15 30 26
Major Shareholders (%)
China Development Bank Corporation 54.3
SRE Investment 14.9
Auditor
Ernst & Young
Price Chart
Turnover (HK$mn) Price (HK$)
Source: Bloomberg, Orient Securities (Hong Kong)
0.0 0.1 0.2 0.3 0.4 0.5 0 1 2 3 4 5 6 7 8 9
15-Nov 16-Feb 16-May 16-Jul 16-Oct
CNTD HSI
Figure 2: Situation of public free float is less than 25% upon completion of delisting in SGX
Source: Company data, Orient Securities (Hong Kong)
To be delisted from Singapore
Delisting from Singapore market
CNTD announced the detail arrangement of delisting from Singapore Exchange (SGX) in Oct 2016. This delisting is not a privatization exercise. According to the Company, it intends to maintain listing position in Hong Kong Exchange (HKEx). If shareholders who trades their shares in SGX and want to continue to hold the shares, the have to transfer the share to HK. In our view, although there is no significant change on CNTD’s fundamental, delisting in SGX will concentrate the trading activities in HKEx, as well as trading volume in Hong Kong. It will bring a better liquidity to the shares, and hence benefit to the Company by lowering the liquidity risk for its shareholders.
Cash exit offer to shareholders on SGX
As CNTD planned to delist from SGX, the Company offers a cash-exit option for the shareholders on SGX. The Tender Price is SG$0.07/share in cash (or ~HK$0.39/share). If 100% of S-shares are being bought back, it is estimated that the total consideration will be SG$175m (or RMB852m). The cash on hand was RMB2.4bn as of end-1H16, therefore financial resources will not be concern. According to the announcement, the Tender Price (SG$0.07/share, or HK$0.39/share) is final and will not be further increased.
Potential risk on minimum public float
If more than 30.2% of available shares are tendered by Shareholders, CNTD will not have sufficient shares held in the public under the HK listing rules. If that the case, according to management, placement of shares will be considered in order to maintain the minimum public float of 25%. In logical thinking, we expect the placing price will not be significantly deviated from the cash-exit offering price (HK$0.39/share) due to avoidance of arbitrage. Furthermore, leverage on the strong network of China Development Bank (CDB) Group, we believe that it will not be difficult for CNTD, as the property development project listing arm of CDB Group in HK, to find investors for taking up the placing shares. CNTD has received irrevocable undertakings from shareholders holding 20% of entire issues shares that will not tender their shares. SRE Investment is one of the undertaking shareholders. Considering CNTD explicitly mentioned on the announcement that it is intentionally maintain listing position in HK, we assume 25% (Scenario 2) of available shares to accept cash offer and the public float to remain at ~25% in foreseeable future.
Figure 1: Scenario of shareholding percentage taking the cash-exit offer
Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5
Shares taking offer 0% 25% 50% 75% 100%
No one from SGX take the cash offer
Some investors take the offer but maintain the public float requirement
More investors take the offer, such that the minimum public float requirement is not met
Shareholder CDB Group 54.3% 58.0% 62.2% 67.1% 72.7% Undertaking Shareholders - SRE Investment 14.9% 15.9% 17.1% 18.4% 20.0% - Other undertaking shareholders 5.3% 5.7% 6.1% 6.6% 7.1% Public Float 30.8% 26.1% 20.7% 14.4% 7.1%
Source: Company data, Orient Securities (Hong Kong)
9.8bn share
7.3bn share
2.5bn share
Assuming 100% of share taking offer, about 2.5bn will be repurchases
After deducting the shareholding of CDB, SRE Investment and other non-public shareholders, public free foal will drop to 7.1% Public 0.5bn share Non-Public 6.8bn share
+
Public 1.8bn share 1.7bn share CNTD can place 1.7bn new share to public such that the public free float ratio go back to 25%See last page for disclaimer. 3
Cooperating with Vanke
New town project Co-developing with Vanke
The Company announced a new project intake via a newly established project company JV with Vanke (2202 HK), the largest property developer in China in terms of contracted sales amount. The Project is located in the junction of Mentougou District (门头沟区) and Haidian District (海淀区), 7km from Zhongguancun (中关村) and 30km from the center of Beijing. It is one of the major new town projects in Beijing rural area for entertaining the growing demand for living area, as well as leisure and resort.
The phase 1 of the development project will be the 250,000sqm of collectively owned construction land in Mengwu Village (which is located in eastern zone of the entire project). After discussing with management and considering with its geographic advantage from Zhongguancun, we believe the phase 1 project will mainly focus on commercial property for technology industry.
Low land cost
The compensation includes 1) contracting fee of RMB3psm per year for agricultural land, 2) annual service fee (RMB2.9m for phase 1), and 3) annual entrustment return (10% of operating profit or RMB3.2m, whichever the higher for phase 1). We estimate the annual land cost is ~RMB7m per year, which translates into ~RMB600psm (assuming the cap rate is 5%). Cost for land use right is low comparing with other property development project in tier 1 cities.
No P&L effect in short term
We estimate that the construction and development cycle is as long as five years and will not bring profit to CNTD in short term. Nevertheless, considering with good track record of Vanke and CDB Group, we believe the project would be mid-to-long term growth driver to the Company. According to management, western zone of Junzhuang Town is mainly construction land and will cover business opportunities of shanty town reformation, primary land development as well as secondary land development. The potential is huge. Assume the unit construction and development cost is RMB3,000psm, and project IRR to be 15% (which is similar to the other projects intake from CNTD), we estimate the attributable overall investment size (for eastern zone only) will be RMB1.7bn, which will bring net profit of RMB185m to the Company.
Figure 3: Development of Junzhuang Project in Beijing Mentougou District
Source: Company data, Orient Securities (Hong Kong)
Western Zone Total size: 1.44m sqm
Land use: Construction use
Development: Shanty town reformation, primary land development as well as secondary land develop- ment.
(No major cost is needed to paid as of end Oct 2016)
Eastern Zone Total size: 1.59m sqm
Land use: Agricultural land
Development: West-hill Pear Park, cultural and eco-conservancy
Total size: 0.86m sqm
Land use: Construction
Development: Tourism property project, retirement and health, family resort
Land cost (per annual)
1) Contracting fee: RMB3psm (for the 1.59m sqm of agricultural land in eastern zone)
2) Service fee: RMB2.9m (5% upward adjustment for every 5 yrs started from 2020 3) Entrustment return: RMB56,000 in 2017 RMB112,640 in 2018 RMB168,960 in 2019 RMB3.2m in 2020 RMB3.2m or 10% actual operating profit whichever is higher beyond 2020
Phase 1 project Total size: 250,000 sqm
Land use: Construction
Development: we estimate the land will be used for commercial property project for technology industry
Change our rating to HOLD for profit taking
Good corporate governance with right decision, but …
We believe the delisting in SGX can eliminate diversion effect of trading activities from the two stock exchanges. We can see trading volume of the dual listing companies being thickening from delisting in SGX. The enhancement of trading volume will bring more attention of investor on CNTD. We think it will be one of long term re-rating factors. Furthermore, to cooperate with Vanke, in our view, not only can utilize its expertise of project development, but also can form endorsement effect amid the market. We believe publicity of CNTD will be improved. All these reflect good corporate governance of CNTD.
Positive has been factored in
Although the curbing policies will cool down the overheated property market, strong demand for residential driven by commoditization together with China’s QE is expected to support the property market in higher tier cities, such as Shanghai. We revise up the land sales amount and ASP for CNTD in FY17-18E. It is the major net income revising factor. Due to the change of reporting scheme such that the investment income from new town projects will be booked as revenue, we significantly revise up the revenue projection by 225% and 257%, respectively in FY17-18E. For the net income upward reversion, it is mainly due to the write back of the equity carrying amount in JV Company, which is a non-cash one-off. Due to intake of the Beijing new town project, we revised up our investment income beyond 2020, and our fair value estimation to HK$0.46/share. We maintain our target NAV discount at 20%. And our new target price is HK$0.37 (original target price was HK$0.31) based on DCF model. Our new target price is equivalent to 0.8x FY17E P/B, which is similar to the peers’ average in the counter. Nevertheless, the share price has been up ~60% since our initiation. We believe most of the positive factors have been factored in. We think it is a good time for profit taking and change our rating to “HOLD”.
Figure 4: Major assumption change of our estimation
FY16E FY17E FY18E Remarks
Original New Chg (%) Original New Chg (%) Original New Chg (%)
Revenue (RMBmn) - 227 269 872 224.7 277 987 256.6 Change of reporting scheme
Pre-tax profit (RMBmn) 350 411 17.3 187 249 33.1 263 346 31.4
Net income (RMBmn) 335 393 17.1 150 228 52.0 211 319 51.6 Revised up land sales income
Dividend payout (RMBmn) - - 150 24 (83.7) 211 35 (83.4) Revised down payout ratio due to Payout ratio (%) - - 100.0 20.0 (80ppt) 100.0 20.0 (80ppt) increase in demand for capital
Source: Orient Securities (Hong Kong)
Figure 5: P/B Band Figure 6: Historical P/B
Source: Company data, Bloomberg, Orient Securities (Hong Kong) Source: Company data, Bloomberg, Orient Securities (Hong Kong)
0.0 0.2 0.4 0.6 0.8 1.0 1.2 2011 2012 2013 2014 2015 2016 (HK$) 1.14x 0.94x 0.74x 0.54x 0.34x 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 2011 2012 2013 2014 2015 2016 (X) +1 sd average -1 sd
See last page for disclaimer. 5
Financial statements & forecast
Income Statement (consolidated)
Balance Sheet (consolidated)
FY-end Dec (RMBmn) FY14* FY15* FY16E FY17E FY18E FY-end Dec (RMBmn) FY14 FY15 FY16E FY17E FY18E Revenue 93 203 227 872 987 Current Assets 9,228 9,966 6,720 6,535 6,379
Land development 57 67 - 552 608 Inventories 1,549 1,546 1,546 1,423 1,299
New town projects 8 97 183 216 266 Trade/bill receivables 64 59 62 65 69
Other income 29 39 44 104 113 Other receivables 1,906 1,416 991 425 142
Cash and equivalent 795 1,569 1,493 1,432 1,486
Cost of goods sold (651) (12) (1) (369) (369) Assets classified as held for sale 4,904 4,804 - - -
Gross profits (558) 191 226 503 617 Investments - 570 628 690 759
SG&A (91) (98) (77) (139) (151) Other current assets 9 2 2,000 2,500 2,625
Other gain (loss), net 20 5 (1) - - Non-current Assets 585 920 1,163 1,418 1,795
Operating profit (629) 98 149 364 466 Investments 490 701 874 1,084 1,388
Finance Expense (87) (70) (112) (124) (130) Net fixed Assets 41 40 86 127 165
Other non-op profit (loss), net 616 60 375 10 10 Others 53 179 203 207 242
Pre-tax profit (100) 88 411 249 346 Total Assets 9,812 10,886 7,883 7,953 8,174
Income and withholding tax 45 5 (18) (22) (27) Current Liabilities 5,944 5,381 1,948 1,908 1,877
Profit After Tax (55) 93 393 228 319 Accounts Payable 278 421 442 464 487
Discontinued operations (150) (58) - - - ST Borrowings 896 365 350 350 350
Minority 144 29 - - - Liab. from held for sale assets 3,472 3,366 - - -
Net income (61) 65 393 228 319 Others 1,297 1,228 1,156 1,093 1,040
Core net income (554) 17 119 228 319 Long-term Liabilities 21 1,621 1,713 1,914 2,015
EBITDA 13 161 528 383 490 Long-term Debts - 1,600 1,690 1,890 1,990
EBIT (13) 158 523 374 476 Others 21 21 22 23 24
EPS (RMBcent) (0.7) 0.7 4.0 2.4 3.5 Total Liabilities 5,965 7,001 3,661 3,821 3,892
DPS (RMBcent) - - - 0.3 0.4 Minority 322 293 306 306 306
Shareholder equity 3,526 3,591 3,917 3,826 3,976 Cash Flow (consolidated)
Total equity 3,847 3,884 4,222 4,132 4,282 FY-end Dec (RMBmn) FY14 FY15 FY16E FY17E FY18E Net debt (cash) 101 396 547 808 855
Profit before income tax (239) 34 338 153 218 Net gearing (%) 3 10 13 20 20
Depreciation & Amortization 26 3 5 9 14 BPS (RMBcent) 35.8 36.5 39.8 41.5 43.1
Gain from investment/disposal (634) (227) (214) (267) (338)
Financial cost 191 145 112 124 130 Key Ratios
Change in working capital 208 317 90 709 427 FY-end Dec (RMBmn) FY14 FY15 FY16E FY17E FY18E
Tax paid 4 (12) 2 (15) (27) Growth (%)
Impairment gain/loss and others 548 (41) 162 (37) (36) Revenue (85) 118 12 283 13
Operating Cash Flow 104 219 495 677 388 EBITDA (93) 1,128 229 (27) 28
Net CAPEX (28) (34) (53) (53) (53) EBIT (110) 231 (29) 27
Net additional in investment (507) (210) (1,976) (852) (600) Net profit 503 (42) 40
Return from investment - 20 214 267 338 Margin (%)
Advances from Disposed Assets 554 - 1,437 - - Gross profit (599.1) 93.9 99.5 57.6 62.6
Interest received 19 38 38 37 36 EBITDA 14.0 79.1 232.2 43.9 49.6
Others 0 (2) - - - EBIT (14.2) 77.8 230.2 42.9 48.3
Investment Cash Flow 38 (188) (339) (601) (279) Net income (65.9) 32.1 172.6 26.1 32.4
Capital injection 1,139 - - (213) - Others (%)
Net debt financing (1,046) 813 76 200 100 Effective tax rate 45 (6) 4 9 8
Restricted deposits 196 (206) - - - Payout ratio - - - 11 11
Dividend paid - - - - (24) Average ROE (2) 2 10 6 8
Interest paid (191) (115) (112) (124) (130) Average ROA (1) 1 4 3 4
Others 500 - (0) - - Interest coverage (x) 0 2 5 3 4
Financing Cash Flow 597 492 (37) (137) (55)
Net cash change 739 522 120 (61) 53 Semi-Annual Breakdown
Cash b/n at year-end 795 1,569 1,493 1,432 1,486 Year End: Dec 31 (RMBm) 2H14 1H15 2H15 1H16 2H16E
Revenue 40 59 144 109 119
Key Assumptions
Gross profit (565) 71 120 107 119
Year End: Dec 31 (RMBm) FY14 FY15 FY16E FY17E FY18E Operating profit (620) 30 68 63 86
Investment porfolio size (RMBm) 490 1,439 1,491 1,764 2,137 Pre-tax profit (37) 10 78 112 299
Nanjing Yuhuatai project 490 490 490 490 490 Tax 45 (10) 15 (12) (6)
Yangzhou Airport Project - 300 300 300 300 Net profit 43 (9) 74 112 281
Danyang Tiansheng PPP Project - 200 200 200 - Gross profit margin (%) (1,430) 120 83 99 100
CBD (BJ) – BOCOM Fund - 69 69 121 145 Operating profit margin (%) (1,568) 50 47 58 73
Others - 380 432 652 1,202 Effective tax rate (%) 121 93 (19) 11 2
B/S growth (%)
Net Margin (%) 108 (15) 52 103 236
Investment portfolio 0 194 4 18 21 EPS (RMBcent) 0.3 (0.1) 0.8 1.1 2.9
Total Debt (71) 119 4 10 4 DPS (RMBcent) - - - - -
Note*: The FY14 and FY15 data is estimated based on the new reporting scheme Source: Company data, Orient Securities (Hong Kong)
Analyst Certification
I, Steve Wong (Cheuk-Wai Wong), being the person primarily responsible for the content of this research report, in whole or in part, hereby certify that:
(1) all of the views expressed in this report accurately reflect my personal view about the subject company(ies) and its (or their) securities;
(2) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report, or our Investment Banking Department;
(3) I am not, directly or indirectly, supervised by or reporting to our Investment Banking Department;
(4) the subject company(ies) do(es) not fall into the restriction of the quiet period as defined in paragraph 16.5(g) of SFC Code of Conduct;
(5) I and my associates do not deal in or trade in the stock(s) covered in this report within 30 calendar days prior to the date of issue of the report;
(6) I and my associates do not serve as an officer(s) of the listed company(ies) covered in this report; and (7) I and my associates have no financial interests in relation to the listed company (ies) covered in this report. Meanings of Orient Securities Ratings
Buy – Describes stocks that we expect to provide a total return of >10% within a 12-month period. Accumulate – Describes stocks that we expect to provide a total return of >0% within a 12-month period.
Hold – Describes stocks that we expect to provide a total return of between -20% and +20% within a 12-month period. Sell – Describes stocks that we expect to provide a total return of <0% within a 12-month period.
Disclosure & Disclaimer
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