Dafa is a real estate developer in the Yangtze River Delta region, focusing on the development and sale of residential properties, ranging from rigid demand, improved demand to high-end customers. Dafa's sales grew at a compound annual growth rate of 78%, from about 2.2 billion yuan in 2015 to about 12.5 billion yuan in 2018 (the same below, except specifically specified). By the end of 2018, the total land storage area was about 3.45 million square meters. After deducting the outstanding turnover area, the estimated value of equity goods was about 30 billion yuan. In order to maintain rapid growth, the company actively seeks to expand to other regions. We think that the shortage of land storage in the company is a bigger problem, and a more active land purchase strategy should be maintained in the future. Although the net leverage ratio is relatively high, Moody's Corporation and S & P were first rated B2 and B respectively in June, which will help them to issue bonds overseas, further optimize their capital structure and reduce interest rates. We give Dafa a target price of HK $6.7 per share, equivalent to an adjusted discount rate of 30% of net asset value, with a "buy" rating for the first time.
Summary of the report
Ploughing the Yangtze River Delta. Dafa is a real estate developer mainly in the Yangtze River Delta region, focusing on the development and sale of residential properties. The company was founded in 1996, expanded its business to Shanghai in 2001, and set up its headquarters there, which has been rooted for more than 20 years. Since 2003, Dafa has opened up Jiangsu and expanded its business to Anhui since 2008. Products are divided into two major product lines: Yue Department and Metro Department, customer-oriented, from rigid demand, improved demand to high-end customers also have relative products.
The value of goods is 30 billion yuan, and the sale is not carried forward for 10 billion yuan. As at the end of 2018, the total land storage area of Dafa is about 3.45 million square metres. after deducting the outstanding turnover area, we estimate that the pure land reserve is available for sale of about 2.7 million square meters, with an estimated equity value of about $30 billion. It is mainly concentrated in the Yangtze River Delta, among which Shanghai, Wenzhou and Ningbo account for a large proportion. In addition, the uncarried-over sales of Dafa at the end of the year is about 10 billion yuan. We estimate that the overall profit for the company is about 800 million yuan, most of which can be delivered in 2019 to support short-term profits.
Expand other regions to maintain high growth. Dafa's sales grew at a compound annual growth rate of 78%, rising from about 2.2 billion yuan in 2015 to about 12.5 billion yuan in 2018. In order to maintain rapid growth, the company actively seeks to expand other areas, and has begun to expand the western region and South China Great Bay area in 2018. In the future, we will continue to increase investment in key cities in southwest and central China, such as Xi'an, Wuhan, Zhengzhou, Nanchang and other cities, in order to seek ways to maintain high growth.
Higher leverage, but within controllable range. Dafa's total net leverage ratio fell from more than 200 per cent in the past (2015-17) to 107 per cent at the end of 2018. After listing in Hong Kong, the company will increase overseas financing channels. The company successfully issued a total of US $300 million of preferred notes in April and July at interest rates of 13.5% and 12.875% respectively. In June, the company was awarded B2 and B ratings (stable outlook) by Moody's Corporation and S & P respectively, and the company obtained the international agency rating for the first time, which is conducive to its overseas bond issuance, further optimize its capital structure and reduce interest rates.
Give a "buy" rating for the first time. The company's soil reserves are concentrated in the Yangtze River Delta and have a strong ability to realize cash. The uncarried-over sales by the end of 2018 are about 10 billion yuan, which is estimated to bring a profit of about 800 million yuan. We estimate that the adjusted net asset value of the company is about 7.1 billion yuan, and the target valuation is 30% discount rate, which is equivalent to the target price of HK $6.70 per share. Dafa's current price is about 7.4 times 2019's price-to-earnings ratio, which is similar to the industry average and is rated as "buy" for the first time. We think that the shortage of land storage in the company is a bigger problem, and a more active land purchase strategy should be maintained in the future.
Risk tips: monetary tightening affects sales; domestic regulation and control is upgraded; leverage ratio is high; soil storage value is low.