Sufficient saleable project resources in tier 1 cities
The company acquired a lot of land resources in Beijing and Shanghai before a sharprally in the land market in 2014-15. The combined gross floor area (GFA) of its landbanks in these two cities is 3.53m sqm. In a conservative assumption, the selling price isRmb50,000/sqm, with total saleable value of Rmb176.5bn. Even assuming that 15%will be used for investment properties, saleable resources in Beijing and Shanghai alonecan still support the company's sales in the next five years. Therefore, we believe thereis sufficient support for the company's 2017E sales of Rmb26bn.
GFA of investment properties growing slowly
The company's property rental business mainly covers office buildings and commercialproperties in Beijing and Tianjin, with about 616,000 sqm being rented out. Its propertyoperation business mainly covers hotels and apartments in Beijing, Tianjin and Huizhou,with about 210,000 sqm under its operation. In recent years, properties operated bythe company have not increased in GFA, while its rental properties have grown by only60-80k sqm annually.
Investment properties unlikely to contribute 30% of gross profit in 2016-18E
In recent years, driven by increasing GFA at rental properties and improvingprofitability, investment properties have contributed an increasing share of thecompany's gross profit, reaching 23% in 2015. However, considering the high volatilityof revenue and settlement in property development, we estimate investment propertieswill contribute 16%/28%/21% of gross profit in 2016-18, and we think they areunlikely to reach 30%. Property development will remain the company's main earningsdriver.
Valuation: Maintain Neutral; raising PT to Rmb10.77
We maintain our 2016-18E EPS at Rmb1.07/0.77/1.08. Our previous PT of Rmb9.80was derived based on 2016E EPS and past five-year average PE + 0.5 SD. In view of theproperty operation business' higher contributions to the company's revenue and profit,our new PT of Rmb10.77 is based on 2016E EPS and past five-year average PE + 1 SD.We maintain our Neutral rating.
