With South China City [HK $1668 HK $2.13, Buy] deciding to pay more attention to real estate development, it has begun to bear fruit, with contract sales rising 24 per cent from April to December 2017 compared with the same period a year earlier. As a specialized property developer with nearly 76 million square meters of land reserve, the company is benefiting from the recovery of small and medium-sized enterprises and the trend of citizens moving to cheap housing. The company currently has a price-to-earnings ratio of 8 times earnings and a price-to-book ratio of 0.6 times (all properties are recorded at a cost of RMB200-400 per square meter), and considering the good value of the company, we maintain a buy rating of HK $2.80.

The latest situation of property sales

South China City announced that contract property sales from October to December 2017 were HK $2.921 billion, up 20.6 per cent from a year earlier. The sales floor area is 306700 square meters, and the average selling price is HK $9500 per square meter, much higher than the HK $8400 per square meter in the first half of the 18 fiscal year.

This brings total contract property sales for the first nine months of the 18 fiscal year to HK $8.371 billion, so our full-year contract sales forecast (HK $11 billion) is expected to be realized. In the company's eight major business areas, most of the contract sales come from Hefei, Zhengzhou and Xi'an.

For the acceleration of the company's real estate sales and completion, there are the following details to pay attention to:

(I) the average gross profit margin of property sales is over 40%. The profit accounts for about 70% of the company's total profit, which far exceeds the rental income of HK $1 billion.

(ii) for some projects, the time from planning to pre-sale may be as short as 24 months. In contrast, the investment payback period of the trade center leasing business model is longer. Therefore, the acceleration of real estate sales should help the company reduce its net debt level (currently about HK $25 billion).

Valuation

The price-to-book ratio of South China City is 0.6 times, close to the low end of the historical range. Our target price is HK $2.80, a 45% discount to the classified plus total valuation of HK $5.10 per share.