Investment highlights:
Incident: In November and December 2016, OCT successively won the right to develop the **** Town Project (11 square kilometers) in **** New District, Bao'an District, Shenzhen, and Shenzhen Huafa collaborated to develop the old renovation project of Huafa Industrial Zone. In the last two months of 2016, we received two projects in the **** New Area of Shenzhen:
1) **** Town: OCT Group and the **** New Area Management Committee signed a strategic cooperation framework agreement to obtain the right to upgrade and develop the 11-square-kilometer area of **** New Area. The Group plans to use “culture+tourism+urbanization” as the main strategic line, upgrade existing established ecotourism resources such as parks, playgrounds, golf courses, etc., and build a multi-functional ecotourism resort with the characteristics of overseas Chinese by relying on the ecological landscape of mountains, fields, and forests in the local area and the cultural landscape of ancient villages. The group plans to invest 5 billion yuan to establish a project company to build a bright town according to an investment scale of 50 to 100 billion yuan.
2) Huafa Industrial Renovation: The old transformation of Huafa Industrial was originally a joint renovation project between Shenzhen Huafa and Vanke. It is located in the core business district of **** New Area. Since receiving the project in August 2015, Shenhuafa and Vanke terminated their partnership in December 2016 due to reasons such as demolition and planning and design. Meanwhile, Shenzhen Huafa's parent company, WuhanZhongheng GroupThe notice will cooperate with Hengxiangji Company of OCT Sun Company (a joint venture between the subsidiary Shenzhen OCT and Shenzhen Huabanli Investment Company) to develop real estate projects in Wuhan and Shenzhen. The Shenzhen project is the old transformation of Huafa Industrial. The Huafa Industrial Renovation Project has a total of four plots of land, covering a total area of 78,400 square meters, and a planned construction area of 457,900 square meters. It is being developed in two phases. Excluding affordable housing and public supporting facilities, housing and commercial offices can sell a total of about 7.35 billion yuan.
The company performed well in the first three quarters. OCT's total sales for the first three quarters of 2016 reached 17.9 billion yuan, up 45% year on year; achieved operating income of 19.05 billion yuan, up 9.25% year on year; net profit after deducting non-return to mother was 2.89 billion yuan, up 16.5% year on year. The performance was steady, and growth was higher than the industry average.
Investment advice: Give a “buy” rating. The company develops steadily under the “real estate+tourism” model, superimposes ecotourism development on traditional housing development and extends the business to urban renewal. Taking into account the company's performance in the first three quarters of 2016, we distributed sufficient land reserves in Tier 1 and 2 cities. We expect the company's earnings per share in 2017 to be around 0.69 yuan per share. The closing price on December 13 was 7.12 yuan, and the corresponding PE in 2017 was 10.36 times. The company was given a price-earnings ratio of 16 times in 2017, with a target price of 11.00 yuan. Give it a “buy” rating.
Risk warning: The industry is being regulated downward by policies.