Main points of investment

After closing on Friday, Hengsheng announced contract sales of 560 million yuan in November, down 37 per cent from the previous month and 18 per cent from a year earlier. Cumulative contract sales in the first 11 months of this year reached 10.35 billion yuan, down 18 percent from the same period last year, and 80 percent of the annual sales target of 13 billion yuan was achieved.

Shen Wan's viewpoint:

November sales fell short of market expectations because the market had expected the company to accelerate sales in November and December in order to meet its full-year target. However, as far as we know, several new listings originally scheduled for the fourth quarter of this year have been postponed until next year, so it is unlikely that sales will accelerate in the short term, and the company is likely to become one of the only two Chinese real estate stocks that fail to meet their annual sales targets.

Corporate governance concerns are difficult to ease, and the visibility of executive improvement is still low. The market has been worried about Hengsheng's corporate governance ability, and the management team has not changed significantly, and the visibility of executive improvement is still low in the short term.

The recent rebound is unconvincing, downgraded to reduced holdings. In the past two months, the company has rebounded by nearly 30% along with the entire sector, but we believe that the company's sales progress is slow and its execution needs to be improved, so such a rapid rebound is not convincing. The company's share price now corresponds to a 66% NAV discount, 0.5 times 2013 PB and 7.7 times 2013 PE. Although compared with the industry, the company's valuation is very cheap, but we believe that there is no sales catalyst in the short term, and the company's short-term loan structure and execution are difficult to be significantly improved, so it is still difficult to achieve revaluation. We keep the target NAV discount of 75 per cent and the six-month target price of HK $1.03 unchanged, meaning 27 per cent of the downside, downgrading the rating from neutral to underweight.