Core profit is expected to increase 32% year over year in FY16
We anticipate that the pre-sale and delivery of Shenzhen Midtown may be delayed until 2018, becoming the biggest uncertainty affecting 2017 results. However, we maintain the recommendation ratings unchanged.
Reasons: 1) The delay was due to the purchase restriction policy; 2) there may be a reversal in performance in 2018 due to contributions from the Midtown project; 3) The incident will not affect the company's high quality fundamentals.
Contract sales in 2017 are expected to be the same as in 2016. Since “930, 2016,” the Shenzhen government has limited the pre-sale price filing limit. Considering gross margin protection, we think the company may delay the launch of Midtown until 2018, which will result in a reduction of 5 to 6 billion yuan in contract sales in 2017.
Profit in 2017 is also expected to be the same as in 2016. The Shenzhen government also further requires planning and acceptance of completed projects (introduced in 2015, implementation began in 2017), which may extend the project delivery time by about half a year.
Key points of interest
Shenzhen state-owned enterprise, excellent quality. We expect the company to obtain land in Pingshan District, Shenzhen through asset injection in 2017. In addition, our parent company, Shenye Group, will also provide strong support in other areas such as financing.
2018 results may be reversed. In 2018, the Midtown Project will provide strong support for the company's performance.
Valuation and recommendations
Due to the delayed launch of Midtown, we lowered our 2017 core profit forecast by 20% to HK$2,896 million, while introducing our 2018 core net profit forecast of HK$3.38 billion (+17% YoY). Considering the company's medium- to long-term prospects, the recommended rating and target price remain unchanged at HK$4.24. The target price is 40% off compared to the 2017 forecast NAV, corresponding to 11.1 times the expected price-earnings ratio for 2017, implying 25% upside. The company's current stock price corresponds to 8.9 times the expected price-earnings ratio for 2017.
risks
Midtown's performance greatly exceeded expectations.