1H15 results a miss
SOHO reported revenue of Rmb393mn, down 92%/71% YoY/HoH.Core NP came in at Rmb72mn, down 94%/87% YoY/HoH. Rental GPMincreased by 17ppt to 78%.
Trends to watch
Transition pain to last. The big drop in earnings was due to 1) zerorevenue contribution from development property (“DP”); and 2)minimal rental income compared to prior DP revenue. We think it takesmultiple years for earnings to grow back to prior level under the newlandlord model. Meanwhile, net gearing would keep climbing (up 4pptHoH to 31% in 2015e) as rental proceeds (CICCe Rmb0.5bn in 2H15)are far from enough to cover capex on new IP (Rmb2.7bn in 2H15).
SOHO 3Q a nice try with challenges remaining. SOHO 3Q, as aco-working community, is a pioneer product in China’s sharingeconomy. But the questions are: 1) what occupancy rate would looklike after promotions exit along with deep discount on rents; and, 2)how volatile this part of revenue will be as SME tenants are morevulnerable to economic cycles (plus the flexible lease term as short as aweek adds to uncertainty).
Downside on dividend yield. Dividend payment was changed fromsemi-annual to annual. We expect dividend yield to decline from 4~6%in 2011~14 to current 1% given weak earnings.
Earnings revisions
We cut NAV by 35% to HK$5.71 and 2015/16e core NP by69%/49% to Rmb247mn/515mn, based on 1) absence ofrevenue from DP; and, 2) lower-than-expected rent and occupancy.
Valuation and recommendation
Given that operating data would be highly volatile during the transitionyears, we base our valuation in 2019 when all IPs are completed. Weestimate that 2019 rental would reach Rmb3bn, and its core NPdiscounted to 2015 should be HK$21bn mkt cap (implied 10% disc. totarget 20x P/E). This gives our new TP of HK$3.99, down 30%.Maintain HOLD. Risk: rental ramp-up faster than expected.
1H15 results a miss
SOHO reported revenue of Rmb393mn, down 92%/71% YoY/HoH.Core NP came in at Rmb72mn, down 94%/87% YoY/HoH. Rental GPMincreased by 17ppt to 78%.
Trends to watch
Transition pain to last. The big drop in earnings was due to 1) zerorevenue contribution from development property (“DP”); and 2)minimal rental income compared to prior DP revenue. We think it takesmultiple years for earnings to grow back to prior level under the newlandlord model. Meanwhile, net gearing would keep climbing (up 4pptHoH to 31% in 2015e) as rental proceeds (CICCe Rmb0.5bn in 2H15)are far from enough to cover capex on new IP (Rmb2.7bn in 2H15).
SOHO 3Q a nice try with challenges remaining. SOHO 3Q, as aco-working community, is a pioneer product in China’s sharingeconomy. But the questions are: 1) what occupancy rate would looklike after promotions exit along with deep discount on rents; and, 2)how volatile this part of revenue will be as SME tenants are morevulnerable to economic cycles (plus the flexible lease term as short as aweek adds to uncertainty).
Downside on dividend yield. Dividend payment was changed fromsemi-annual to annual. We expect dividend yield to decline from 4~6%in 2011~14 to current 1% given weak earnings.
Earnings revisions
We cut NAV by 35% to HK$5.71 and 2015/16e core NP by69%/49% to Rmb247mn/515mn, based on 1) absence ofrevenue from DP; and, 2) lower-than-expected rent and occupancy.
Valuation and recommendation
Given that operating data would be highly volatile during the transitionyears, we base our valuation in 2019 when all IPs are completed. Weestimate that 2019 rental would reach Rmb3bn, and its core NPdiscounted to 2015 should be HK$21bn mkt cap (implied 10% disc. totarget 20x P/E). This gives our new TP of HK$3.99, down 30%.Maintain HOLD. Risk: rental ramp-up faster than expected.
