Event

The company leases the properties of 59 and 60 buildings, 10 Hengshan Road, Xuhui District, Shanghai, and Lane 58, 1487 Central Huaihai Road, with a total contract amount of about 1.075 billion yuan.

Core viewpoints

We will deepen and strengthen the Shanghai market and successfully obtain high-quality properties in the core area. The company has signed a "house rental contract" with Shanghai Water Air Stone Company and Yang Zhiyin. The company leases 59 and 60 buildings at 10 Hengshan Road, Xuhui District, Shanghai, and No. 58 Lane 1487 Huaihai Road, Shanghai. The contract involves a construction area of 37000 square meters above ground and underground. The underlying property is located in the core area of Hengshan Road in Shanghai and is a scarce core asset in first-tier cities. The accumulated rent payable by the company during the lease period is 1.075 billion yuan, and the annual rent during the lease period is increased by referring to the average CPI of the previous five years and 1.5%. If the increasing ratio is less than 1.5%, it is calculated as 1.5%. The income is calculated and paid according to the rent quarter. Each rental quarter, the company and the Shanghai Water Air Stone Company distribute the operating profit of that quarter with 30% and 70% of the total operating profit. The company is responsible for the property management during the lease period, and the property management company can be designated to be responsible for the management, which is conducive to business coordination and ensure the profitability of the project.

Create a benchmarking project again to continuously enhance the influence of the brand. The target property is located in the core area of Hengshan Road in Shanghai, and the signing of the lease operation contract will help the company to create another benchmarking project in the traditional core area of Shanghai and enhance the influence of the brand. Although the amount of rent payable during the lease period is relatively large, it is obviously helpful to the long-term business development of the company. The company leases the property, enhances its value through the transformation design, and locks the property in the core area of the key city to help the company to achieve sustained and stable profits. Due to the influence of the new leasing standards, the leasing operation model will lead to changes in right-to-use assets, lease liabilities and other subjects, resulting in an increase in the company's total assets and an increase in the company's asset-liability ratio.

Since all liabilities are interest-free, they will not lead to a significant increase in leverage and affect operational stability. We believe that the signing of this major contract once again confirms the company's competitiveness in the Shanghai area and will also help to continue to develop high-quality projects in the future.

Keep the buy rating and target price unchanged. We predict that the EPS of the company from 2021 to 2023 will be 0.43 yuan 0.52 yuan 0.61 yuan, and give a valuation of 30X in 2021, corresponding to the target price of 12.90 yuan.

Risk hint: the rental rate is lower than expected; the expansion of new projects is lower than expected.