The core business of 00604.HK includes real estate development (including residential real estate, industrial real estate and commercial real estate), property investment and property management. The controlling shareholder of the company is Shenye Group Co., Ltd., with a shareholding ratio of about 62.91%. The actual control party of the company is Shenzhen SASAC. The company is also the largest real estate listed company under Shenzhen SASAC.
The property development business has a large reserve in Shenzhen and Dawan area.
The company proposed to focus on the strategic layout of the Greater Bay area in 2017. By the end of December 2019, the total construction area of the company's land reserve planning is 4.38 million square meters (equity part 3.83 million square meters), and the capacity construction area is 3.27 million square meters (2.91 million square meters). Among them, the capacity building area of the land reserve in the Great Bay area accounts for 51%.
In the medium to long term, we believe that the sustained growth of the company's property development business has sufficient momentum: 1. The company has a large number of projects under construction and land reserves in Shenzhen and the Greater Bay area, and is expected to continue to realize profits in the next few years. 2. The construction of Shenzhen Socialist first demonstration Zone may accelerate the release of more opportunities for urban renewal projects, and the company is expected to continue and fully benefit from its good resources and competitive advantages in the field of urban renewal in Shenzhen. 3. The landing of Guangdong-Hong Kong-Macau Greater Bay Area's plan is also expected to accelerate the release of project opportunities in the area, and the company is expected to continue to benefit.
The property investment business is growing rapidly and is expected to accelerate in the medium term.
Property investment business is the company's second largest source of profit contribution. From 2014 to 2018, the company's investment property rental income grew at an average annual rate of about 13%. The company's investment property rental income recorded HK $1.07 billion in 2019, an increase of 8.9% over the same period last year.
By the end of December 2019, the company's total investment property area was about 129 million square meters, of which 81% was located in Shenzhen (about 105.5 square meters). The company's goal in property investment is to build about 700,000 square meters of investment properties in three years from 2019 to 2021. According to this goal, the investment property area of the company will reach 1.8-1.9 million square meters in 2021. We believe that the company's property investment business is expected to become the company's fastest growing business in the medium term, and the share of revenue and profit contribution is expected to continue to increase.
Steady growth of property management business
The company's property management business takes over more than 3540 million square meters of property, including office, residential, government property and so on. In addition, the company also took over more than 2.9 million square meters of property in the industrial park. Property management business is the company's second largest source of income, which has maintained steady growth in recent years.
The company's goal in the property management business is to generate HK $3 billion in operating services over the next three years, including property management, smart park operation and management, and commercial operations, and plans to spin off and list at the right time.
It is expected to continue to benefit from the construction of Guangdong-Hong Kong-Macau Greater Bay Area and Shenzhen socialist demonstration zones.
As the largest real estate listed company under Shenzhen SASAC, the company has obvious advantages in obtaining project resources in Shenzhen area and even Dawan area. The controlling shareholder of the company is Shenye Group. Shenye Group is a large comprehensive enterprise group wholly owned by Shenzhen Municipal Government and directly managed by Shenzhen SASAC. By the end of 2019, Shenye Group had total assets of about 140 billion yuan, net assets of about 50 billion yuan, and land reserves of nearly 10 million square meters. Shenzhen Holdings is the core enterprise under Shenye Group.
We believe that relying on a large number of resources, the company's future development will fully and continuously benefit from the construction of Guangdong-Hong Kong-Macau Greater Bay Area and Shenzhen Socialist pilot Zone.
Profit forecast
We expect the company's total revenue to grow slightly in 2020. Specifically, we believe that due to the impact of the epidemic, the company's property investment and property management business revenue for the whole year is year-on-year or overall flat. At the same time, the property development business, which accounts for the highest proportion of income, is expected to grow, leading to a small increase in total income.
We predict that the company's net profit in 2020 may decline slightly, on the one hand, because of the relatively high base in 2019, and on the other hand, due to the obvious impact of the epidemic in the first half of the year, the growth momentum of the company's revenue will be weakened, while the cost side will be somewhat rigid. there is a possibility of a decline in the overall gross profit margin (see next page for specific profit forecasts).
Valuation and investment rating
The closing price of Hong Kong shares of Shenzhen Holdings (00604.HK) on March 31, 2020 is 2.42 yuan, corresponding to our forecast results of about 5.5 times PE and 0.46 times PB. The company's valuation is currently at an all-time low, and although the COVID-19 epidemic has had an impact on the company's short-term performance, the recent fall in share prices has reflected this impact.
In addition, from the perspective of dividend yield, the average dividend yield of the company in 2013-2019 is more than 6% (calculated according to the annual dividend divided by the share price at the end of the year), while based on the 2019 annual dividend and the current stock price, the company's dividend yield has reached about 7.5%.
In the medium and long term, as a dominant local state-owned enterprise in Shenzhen with a large number of core assets and high-quality resources, the impact of the epidemic on medium-and long-term profitability and growth prospects may be relatively slight. And with its strong financial resources, the company is expected to obtain more project resources to support medium-and long-term development in the overall economic downturn. The current undervaluation provides a better buying opportunity for investors. Give a buy rating. (note: the above data are all from listed company announcements, company websites, Wind, Guoxin Securities (Hong Kong) Research Department)
Risk hint
The medium-and long-term negative impact of COVID-19 's epidemic on the economy exceeded expectations.