The outlook for Shenzhen Holdings (00604) is positive, recommended
Guohao Capital
It is recommended to buy Shenzhen Holdings (604). Benefiting from Shenzhen's booming real estate market, China's housing market has improved markedly in the last two months, supported by a series of interest rate cuts and relaxed mortgage loan policies. National housing sales increased 10.0% year-on-year in the first half of 2015, sales area increased 3.9% year-on-year, and average prices increased 5.9% year over year. National housing sales increased 32% and 24% year-on-year in June and May, respectively, a marked improvement compared to the 3.2% year-on-year decline recorded in the first four months of 2015. The area under construction of new homes fell 15.8% year-on-year in the first half of 2015, reflecting that developers are speeding up inventory removal.
According to data from the China Index Research Institute [Weibo], the average price of new homes in China's 100 major cities recorded an increase for two consecutive months as of June. Prices of new homes in Shenzhen rose 7% month-on-month and 16% year-on-year in June. In response to the possibility that China will cut interest rates again and the problem of excess inventory in first-tier cities has been resolved, the Bank believes that the recovery trend in the Chinese housing market will continue in the second half of 2015.
Shenzhen Holdings (604, $3.48) is one of the best performing domestic housing stocks, and its stock price has risen 51% so far this year. The Shenzhen Municipal Government is the controlling shareholder of the company, accounting for 60.7% of its shares. The Bank recommended buying this stock because of the company's low valuation, stable financial position, strong contract sales, and the high correlation between its performance and Shenzhen real estate. The land reserve area being developed by the company reached 9.8 million square meters by the end of 2014, and about 19% of that area was located in Shenzhen. Since the company's real estate project in Shenzhen is very popular in the market, its contract sales reached 7.66 billion yuan (6.2092, -0.0004, -0.01%) in the first half of 2015, representing (i) an increase of 134% year-on-year, (ii) its sales in the first half of the year equal to 104% of the company's contract sales for the full year of 2014, and (iii) accounting for 70% of the company's target sales of RMB 11 billion for the full year of 2015. The company placed 670 million new shares to institutional investors at $413 each in June 2015, raising approximately HK$2.73 billion. Its allotment of shares is expected to reduce the company's net debt-to-equity ratio from 65% at the end of 2014 to 51%, far lower than the peer-to-peer average of 80% net debt-to-equity ratio. According to Bloomberg data, the company's current price is equivalent to 0.75 times the market account rate for the first half of 2015, while its dividend rate in 2015 was 5.0%, the price-earnings ratio in 2015 was 7.8 times, and its core earnings per share increased by 60%. The valuation is quite attractive in the bank's opinion. The Bank calculates a six-month target price of the stock at $4.20 based on 0.9 times the market account ratio. The market consensus target price is 5.09 yuan.