Key points of investment
For four consecutive years, China's real estate enterprises are 100 strong: the Great Development was established in 1996 as a developer of unsustainable real estate production in the Changjiang Delta. Contract sales in 2018 were 125 billion yuan, and in 2019, they ranked 86th in the list of "China's top 100 real estate enterprises." and has entered the list of "China's 100 strong real estate enterprises" for four consecutive years. As at June 30, 2019, the company had an area of about 4.32 million square meters of land, more than 80% of which were located in Zhejiang, Jiangli and Anhui provinces, with a net value exceeding more than 500 yuan, and the average cost of land was 3500 yuan per square meter. In addition, the company also holds investment property worth more than 20 yuan.
The company was listed in Hong Kong in October 2018 at HK $4.2 per share. After the listing, the founding family members still hold 72.5% of the shares in the company.
High-end sales, "1x-5X" strategic sales and "situational real estate": the implementation of the high-end sale model is aimed at starting construction within three months after the resumption of land, opening the expected sale within three months after the commencement of construction, and realizing a return of cash flow within four months after the sale. The company operates the strategic management system of "1x 5X", deeply ploughing the long Triangle, speeding up the development of Chengdu and Chongqing, Xi'an, North Asia, Bohai Sea and Greater Asia, and actively looking for other key cities with high development power. The company advocates the concept of "situational land production", based on the daily activities and emotional needs of users, equips them with equipment, builds spaces, and creates different concrete scenarios.
The control of real estate has increased, but the company's handling is not poor: China has continued to exercise control over the real estate industry, including repeatedly reiterating that housing speculation and restrictions on the overseas development of real estate enterprises can only be used to purchase loans that expire within one year and not to apply for new ones. The company's main achievements are the rapid growth of GDP in the Changjiang Delta region, the continued increase in the number of permanent residents in Zhejiang, Anhui and Zhejiang, the high increase in the housing index of major cities in Zhejiang and Anhui, and the fact that the company still has US $120 million to apply for new financing.
Valuation and level: the sales of Dafa contracts in the first half of 2019 was 7.11 billion yuan, an increase of 40.8% over the same period last year, and 44.4% of 160 yuan in sales for the whole year. It is believed that the target can be successfully achieved in 2019. In view of the company's high performance model and low financial strength, we expect contract sales in 2018-2021 to grow at a compound annual growth rate of 41.9%, and earnings to grow at a compound annual growth rate of 44.7% in 2018-2021. The compound annual growth rate of profit attributable to operating equity is 44.5% in 2018-2021.
Based on the conservative calculation of 10800 yuan per square meter, 37.2% interest rate for property sales excluding land cost, and 20% discount to the net face value of investment, NAV is valued at 5.97 billion yuan. Therefore, the target price of HK $8.0 is equivalent to 8.6 times 2019 adjusted price-to-earnings ratio and 1.7 times 2019 market price ratio.
It is suggested that: 1) the central government's real estate control efforts have been intensified; and 2) China's economic growth has been weaker than expected.