South China City (1668): A positive technological breakthrough — maintaining the purchase of South China City (1668, $3.78) is China's leading real estate developer and operator of a large-scale integrated logistics and commodity trading center. Its stock price rose 9.2% last Friday, accompanied by unusually high turnover. This can be seen as a positive breakthrough in technology. We maintain our purchase rating. The target price for 6 months is 4.70 yuan, which is equivalent to 8.0 times the predicted price-earnings ratio for FY2015. From April 11 to May 5, the company repurchased 31.3 million shares on the open market, with an average share price of 3.50 yuan, which is consistent with the subscription price of 244.8 million new shares obtained by Tencent (700). After establishing a partnership with Tencent at the beginning of this year, South China City accelerated the pace of its business expansion and successfully extended the maturity of its debt with lower financing costs. In January, the company signed a framework agreement with the Chongqing Municipal Government to build and develop a large-scale integrated trade logistics and trading center, with an estimated total net area of 6.26 million square meters. In February, the company bought the remaining 35% of the shares in its Xi'an project for RMB 260 million. In March, the company signed a letter of intent for cooperation with the Guangzhou Municipal Government, planning to build and develop a large-scale integrated trade, logistics and commodity trading center. The total planned construction area is estimated to reach 10 million square meters. In April, the company purchased land use rights in Hefei at a price of RMB 208 million. The planned construction area of the Hefei project was expanded from 3.94 million square meters to 4.84 million square meters. In May, the company signed a framework agreement with the Nanchang government to develop and operate e-commerce, warehousing and logistics centers, estimated to cover a total area of about 2,300 acres. Today, South China City has nine large-scale integrated logistics and commodity trading center projects at different stages of development in Shenzhen, Guangzhou, Chongqing, Nanchang, Nanning, Xi'an, Zhengzhou, Harbin and Hefei. For the fiscal year ended March 31, 2014, South China City completed contract sales of 1.75 million square meters of construction area, with sales of 14.1 billion yuan, up 147% and 72% year-on-year respectively. We expect gross margin to fall from 57% in FY2013 to 51% in FY2014, but still higher than the industry average of 34%, reflecting the company's ability to acquire land at low prices. The slowdown in residential property sales in China had limited impact on the company. According to profit forecasts collected by Bloomberg, after excluding property revaluation earnings, the company's core profit will increase 41% year-on-year to 2.5 billion yuan in FY2014, and 63% year-on-year to 4.09 billion yuan in FY2015. The current price is equivalent to 9.6 times and 6.5 times the projected price-earnings ratio for FY2014 and FY2015. We don't think the valuation is expensive.