We expect that China Merchants Land will speed up its cooperation with the parent company in 2016, or have the opportunity to participate in the project development of Qianhai and Hong Kong.
We have lowered the company's profit forecast, but considering that sales of a large number of projects will be carried forward, we expect core profits to grow substantially by 147% in 2016.
Taking into account the devaluation of the renminbi, we cut the NAV by 13 per cent and the target price by 15 per cent to HK $1.70. We find the current valuation level, which is 57 per cent discount to NAV, attractive (0.5 standard deviation below the historical average). Maintain the buy rating
Development slows and profits are cut
According to the data of CRIC and SouFun, we have noticed that the contract sales of China Merchants Land and the completion of the project are slower than expected. And taking into account the recent negative impact of the devaluation of the RMB, we reduced the company's 16-year profit of 14% and 12% in 2015. But most of the China Merchants Land projects will be completed in 2016, when revenues will soar 85 per cent year-on-year and profits will climb to 952 million yuan in 2016, an increase of 147 per cent.
Or participate in the development of new projects in Qianhai and Hong Kong
In 2016, we expect the main catalyst to come from the asset injection of the parent company. Its parent company, China Merchants Shekou Industrial Zone (001979 CH), was restructured and listed in December 2015. By participating in the project development of Qianhai, we believe that China Merchants will speed up the adjustment of its land mix. In addition, China Merchants Land is also actively seeking development opportunities in Hong Kong. We think that the parent company may inject some existing Hong Kong assets or land reserves into China Merchants in 2016.
The valuation is 57% lower than the NAV, which is about 0.5% lower than the average.
Due to the slower-than-expected carry-over rate of the project and the negative impact of the depreciation of the RMB, we slightly reduced our NAV to HK $2.70 per share (before adjustment: HK $3.10 per share) one year later. Maintain the buy rating and lower the target price to HK $1.70, which is still a 36 per cent discount to NAV a year later, compared with a 57 per cent discount to the share price. .