Baishizhou project 80% equity injection, asset value will be gradually released
Baishizhou assets 80% equity injection: on August 25, the company announced that the company subscribed shares to Fuye Investment, Zhongji and Shengcheng Investment with a total consideration of RMB 4.07 million. Together with the 25% equity (consideration US $10,000) injected into Baishizhou on October 28, 2019, the company and controlling shareholder Huang Kangjing indirectly hold 80% and 20% of Baishizhou Urban Renewal Project ("Baishizhou Project"), respectively.
The value of the Baishizhou project will be gradually released, which is expected to improve the company's sales and thickening performance: as of the first half of the year, the company has 173 million square meters of land reserves (86% of equity), with a saleable value of about 69.5 billion yuan, most of which are located in Shenzhen and other first-and second-tier cities. it can effectively ensure the smooth completion of 40-6 billion contract sales per year.
In addition, considering that the injection of the Baishizhou project has been completed and the project is progressing steadily, the Baishizhou project has been approved with a special plan with a capacity area of about 3.58 million square meters and a construction area of about 1.8 million square meters. It is estimated that it can contribute about 200 billion of the value of goods (assuming that the self-owned property is also used for sale). The development will be carried out in three phases and the development cycle is expected to be 8 to 10 years. The first phase is expected to start in early 2021 and will be sold in 22-23. With the launch and development of the Baishizhou project, the company's size and profitability will increase by leaps and bounds.
The medium-term results fluctuated in the short term, and the annual sales target remained unchanged: by mid-2020, the company achieved operating income of 767 million yuan, down 28% from the same period last year, gross profit of 441 million yuan, down 33% from the same period last year, and net profit of 192 million yuan, down 96% from the same period last year. Company performance decline: 1) mainly because the company focuses on urban renewal business and the current sales scale is small, it is vulnerable to periodic fluctuations carried forward by individual projects. 2) the financial cost has increased by 40%. The Hong Kong NEO was completed in the second half of 2019 and the interest was expended. 3) the effective tax rate has risen sharply to 93%, mainly due to the increase in overseas undeductible use (such as adjustment of US dollar debt terms, Hong Kong NEO impairment, Hong Kong NEO financial expenses, etc.). If excluded, the adjusted effective tax rate will return to the normal level of 44%. Although the company's short-term performance is subject to fluctuations in the project carry-over cycle, considering that in the future, with the entry of Baishizhou, the company's profit growth will be in a steady process.
By the first half of 2020, the company has achieved contract sales of 2.46 billion yuan, and the annual sales are expected to be maintained at 6 billion.
Target price HK $3.54, buy rating: for the development business, Baishizhou has been successfully injected and steadily advanced. Considering the impact of Baishizhou project injection on the company's NAV thickening, we estimate that the company's NAV is about 42.8 billion RMB, giving a 50% discount, corresponding to the development business of 21.4 billion RMB. For investment property, assuming that both the existing operating property and the property under construction achieve stable and mature operation, it is estimated that the profit can be about 315 million yuan. Taking into account the sustainability of recurrent income, a valuation of 25 times is given, and the corresponding investment property is valued at 6.3 billion. The company has a total target market capitalization of about HK $30.8 billion and has a buy rating corresponding to the target price of HK $3.54 after considering the dilution of the shares.