FY16 core net profit fell short of expectations Shenzhen Holdings announced 2016 results: revenue of HK$21.35 billion, up 15.9% year on year; core net profit of HK$2.61 billion, up 21.1% year on year, diluted core net profit of HK$0.35 per share. The annual dividend was HK$0.22 per share, with a dividend yield of up to 6.1% and a payout ratio of 64.3% (based on core net profit). Of this amount, HK$0.05 per share is a special dividend distributed to celebrate the company's 20th anniversary of listing in Hong Kong. As a result, we expect the company's 2017/18 dividend payout ratio to return to normal levels. The gross margin increased to 38.7% (up 4.1 percentage points), thanks to the contribution of real estate projects in Shenzhen. The gross margin of real estate projects in Shenzhen reached 49.9%, accounting for 72.1% of settlement revenue. The net debt ratio was 38.9%; completed inventory was HK$7.51 billion (a decrease of 17%). The company's balance sheet is strong and can provide strong support for any asset injections or land reserve additions in 2017. Development trend The sales target for 2017 is RMB 19.1 billion, which is the same as in 2016. The company has marketable resources of 31 billion yuan (29 billion yuan in 2016), of which more than 80% are located in the Shenzhen region. It is wise to reduce the scale appropriately during the property market regulation period to protect gross margin. We expect that if the physical market picks up, the company's sales are expected to exceed expectations. The profit forecast remains unchanged at the core net profit forecasts of $2,885 million and HK$3,652 million for 2017 and 2018. The valuation corresponds to 9.5 times the current stock price of the proposed company and the predicted price-earnings ratio for 2017. Maintaining the recommended rating, the company's target price was raised 6% to HK$4.50 (25% upside), corresponding to 11.8/9.4 times the 2017/18 price-earnings ratio. Taking into account land reserves and project progress updates, the company's 2017 NAV forecast was raised to HK$8.21 per share. The company's new target price is a 45% discount from the 2017 NAV forecast. The risk is that the regulation of the Shenzhen property market has been upgraded.