Event: the company announced that it will spin off Meiyi, and it is expected to submit an application to the National SME share transfer system Co., Ltd. around September.
Maintain the overweight rating with a target price of HK $1.40. We maintain the company's forecast of earnings per share of 0.23,0.32,0.44 yuan respectively from 2015 to 2017. Excluding the equity value of lottery life, the market values the company's other businesses at only HK $1.7 billion, which is grossly undervalued as a company with sales of more than 100 million. Due to the decline in industry valuation as a result of the market adjustment, the company has lowered its target price to HK $1.40 (50 per cent discount) based on the NAV valuation (currently discounted by 70 per cent), maintaining the company's "overweight" rating corresponding to 5.1xPE and 0.6xPB in 2015.
The performance has increased steadily and the debt ratio has declined in an orderly manner. The company's revenue in the first half of 2015 reached 3.63 billion yuan, an increase of 24.4% over the same period last year. The net profit reached 279 million yuan, an increase of 118.4% over the same period last year. Thanks to the recovery of the industry and hot sales of projects in the Pearl River Delta, contract sales rose 125% to 4.05 billion yuan from 1.8 billion yuan in the same period in 2014, reaching 36.9% of the 11 billion sales target for the whole year. Due to the change in the structure of settlement products (the proportion of housing increased compared with the same period last year), the gross margin fell to 32%. With the reduction in the size of land acquisition, the net debt ratio fell to 79.0% (86.7% at the end of 2014).
Meiyi is expected to break up soon, and the layout of the "community +" ecosystem is perfect. The company's business community management platform Meiyi Home is located in the property management of office buildings and apartments, and its innovative model can significantly improve the occupancy rate of tourism real estate products and hotels. The net profit is expected to exceed 30 million yuan in 2014, and the hosting area is expected to reach 5 million square meters by the end of 2015. The company's "community +" strategy is gradually improved, located in four major communities plus four major applications, entrance and viscosity will become its core advantages.
The light asset model is beginning to show results, and the sub-business is expected to be spun off one after another. With the gradual implementation of the strategic transformation of light assets, the company's debt ratio has declined steadily, and recurrent income, including rent, has increased by 61.6% to 510 million yuan compared with the same period last year, accounting for 14.2%. The continued improvement in the balance sheet is expected to accelerate valuation repair. As the vanguard of industry transformation, the company's power and execution will be re-recognized by the market. The subsequent spin-off of other platforms and application businesses, including Meiyi Home, may reduce the discount of the overall valuation.
Risk factors: the prosperity of the industry is declining, and many business lines have higher requirements for execution.