Investment highlight
We cover 207.HK for the first time with a recommended rating with a target price of HK $1.51. The company is the leading shopping center operator in China:
Dayue City Shopping Center has a superior location: the company's existing eight Dayue City Shopping Mall are located in the traditional business center of the core first-and second-tier cities.
Leading operation ability of shopping center: the company's competitive advantage mainly lies in innovation and quantitative management of merchants through big data. In 2016, the total passenger flow of Dayue City was 130 million, with a bag carrying rate of more than 50 per cent.
The prospects for expansion are bright: we expect the company to double its size by acquiring and building eight Dayue City shopping malls through M & A funds (with a stake of 20-30%) between 2017 and 2020.
What is the biggest difference between us and the market? The investment return of M & A funds is expected to exceed market consensus expectations. We expect the company to forecast that GAV and NAV will grow by 15% in 2017; by 2020 and 2023, the company's commercial real estate profits are expected to increase by another 25% and 32%, respectively.
Potential catalysts: 1) Core net profit is expected to bottom out and rebound in 2016, and core net interest rate is significantly improved; 2) M & A funds are on the ground.
Profit forecast and valuation
It is estimated that the company's earnings per share from 2016 to 2018 are 0.04yuan, 0.08yuan and 0.105 yuan respectively, with a compound annual growth rate of 100% from 2015 to 2018. For the first time, it covers the recommended rating and target price of HK $1.51, implying 30 per cent upside, a 35 per cent discount to the 2017 forecast NAV (DCF valuation of HK $2.32 per share), corresponding to 17.0 times the 2017 / 2018 forecast price-to-earnings ratio. We think the current valuation of the company is attractive, the main considerations are: 1) the company is currently trading at 10.0 times the forecast price-to-earnings ratio of 2017 / 2018, considering that investment properties will contribute about 40% of the core profit from 2017 to 2018. We think the company's valuation is expected to increase. 2) the current stock price is 50% off from the 2017 forecast NAV. Considering that high-quality investment properties account for about 70% of the 2017 forecast GAV, we expect the NAV discount to narrow gradually.
Risk.
The specific arrangements or future performance of M & A funds are not as expected.