Poly Properties Group's revenue increased 22.6% year over year in 2016. Gross profit rose 4.8 percentage points to 16.3%, but it was still not enough to reverse the loss in core net profit. Excluding HK$644 million in revenue from disposal subsidiaries, the core net loss still reached HK$67 million, higher than the market's unanimous forecast of HK$39 million. According to management's performance guidelines, due to the influence of the land reserve structure, the company's sales in 2017 will be the same as in 2016. As the company's net debt ratio fell 20.4 percentage points to 108.4%, we maintained our holding rating.
Key points to support ratings
The sales target for 2017 was RMB 35 billion, which is basically the same as sales of RMB 34.9 billion in 2016. Management believes there are problems with the company's land reserve structure and product types, so sales progress in 2017 will remain slow. About 25% of the company's saleable resources are located in the Yangtze River Delta and Pearl River Delta regions, which are greatly affected by the risk of policy tightening. Although 53% of the company's saleable resources are located in the southwest region and should have benefited from a strong market environment in low-tier cities, the company's completed projects are under pressure to remove inventory, and at the same time, project execution capacity is weak. The company has 49 old projects and plans to develop only 4 new projects in 2017, none of which are located in the southwest region. In February, the company's sales fell 17.6% year on year and 67.4% month on month.
Regarding the restructuring with Poly Real Estate (600048 CH, purchase), management indicated that some progress has been made, but specific plans are still being discussed and studied at the group level. The restructuring still faces issues such as differences in regulatory requirements and capital control between Hong Kong and the Mainland. We don't think the implementation of the restructuring plan will be as fast as the market expects.
We think the company's gross margin will improve further as the average selling price of products rises. Gross margin is expected to increase to 16.7% in 2017. However, net interest rates and return on net assets are expected to remain low at 1.6% and 2.1%.
The main risks faced by ratings
Downside risk: The market pullback was higher than expected under the austerity policy.
Upside risk: Possible restructuring with poly land.
valuations
As net interest rates and net debt ratios improve, we forecast a 4% increase in net asset value to HK$5.94 and target price to HK$3.27, which is a 45% discount over net asset value. The stock price currently corresponds to 0.5 times the predicted net market ratio for 2017. Compared with a 45% discount on net asset value, the current valuation is relatively reasonable considering that the company's return is low, growth is slow, but profit margins have improved.
