Investment advice
We downgraded Shenzhen Holdings' recommended rating to a neutral rating, and lowered the target price by 35% to HK$2.62 (with 2% upside from the current stock price; corresponding to 7.0 times the 2018 price-earnings ratio and 5.6 times the 2019 price-earnings ratio). The reasons are as follows:
Results for the first half of 2018 were weak and below expectations. In the first half of 2018, core net profit fell sharply by 63% year-on-year to HK$1.3 billion, mainly because the sale of rights in third- and fourth-tier city projects in the same period last year brought a one-time income of HK$3.3 billion and formed a high base, but there were no similar returns in the first half of this year.
Earnings growth is expected to be weak in 2018 and 2019. Although project delivery is stable and gross margins are competitive, core net profit is expected to fall 23% year over year in 2018 and increase by only 24% year on a low basis in 2019, mainly due to a lack of similar disposal revenue.
The valuation is reasonable. Currently, the company's stock price corresponds to 6.9 times the 2018 price-earnings ratio and 5.5 times the 2019 price-earnings ratio, which is 58% off the 2018 NAV.
What's the biggest difference between us and the market? We believe that one-time earnings in the next two years will be limited, making it difficult to provide additional support for profit growth.
Potential catalyst: 2018 results were weak and below market expectations.
Profit forecasting and valuation
We lowered our core net profit forecasts for 2018 and 2019 by 36% and 33% to HK$3.1 billion and HK$3.9 billion, respectively, due to lower disposal revenue expectations.
We downgraded Shenzhen Holdings from a recommended rating to a neutral rating, mainly considering that the current stock price already reflects a reasonable valuation. Taking into account the adjustment of profit expectations, we lowered the target price by 35% to HK$2.62 (there is 2% upside from the current stock price; corresponding to 7.0 times the 2018 price-earnings ratio and 5.6 times the 2019 price-earnings ratio).
risks
The company recorded a large amount of one-time earnings to boost profit growth.