Investment highlight
We cover 207.HK for the first time with a recommended rating with a target price of HK $1.51.
Why is the recommended rating given? The company is the leading shopping center operator in China:
The location of its shopping center is superior: the company's eight Dayue City shopping malls are all located in the central business district of the core first-and second-tier cities.
Leading operation ability of shopping center: the company has two core competencies of innovation and big data management. In 2016, the total passenger flow of Dayue City was 130 million, with a bag carrying rate of more than 50%.
There are bright prospects for expansion: we expect the company to acquire a further eight shopping malls and transform them into Dayue City through M & A funds (2030% of the company's equity) between 2017 and 2020.
What is the biggest difference between us and the market? The investment return of M & A funds is expected to exceed market consensus expectations. We expect the company's GAV and NAV to grow by 15% in 2017; by 2020 and 2023, the company's profits from investment properties will increase by 25% and 32%, respectively.
Potential catalyst: M & A fund landing, profit reversal in 2016.
Profit forecast and valuation
It is estimated that the company's earnings per share will be 0.04 yuan, 0.08 yuan and 0.105 yuan respectively from 2016 to 2018, with a compound annual growth rate of 100% from 2015 to 2018. For the first time, it covers the recommended rating and target price of HK $1.51, implying 30 per cent upside, corresponding to a 35 per cent discount for the 2017 forecast NAV (DCF valuation of HK $2.32 per share) and a 17.0 pound price-to-earnings ratio for 2018. We think the company's current valuation is attractive, the main considerations are: 1) the company's shares are currently trading at 10.0 times the forecast price-to-earnings ratio for 2017 / 2018, considering that investment properties will contribute about 40% of the core earnings from 2017 to 2018. We think the company's valuation is expected to increase. 2) the current stock price is 50% lower than the forecast NAV in 2017. Considering that high-quality investment properties account for about 70% of the forecast GAV in 2017, we expect the NAV discount to narrow gradually.
Risk.
The specific arrangements or future performance of M & A funds are not as expected.