AMTD Research - 7 April 2017

China Aoyuan (3883.HK; Buy) - Continuous growth supported by strong execution

Initiate with Buy rating: High earnings visibility; low valuation; industry consolidation provides growth opportunity

China Aoyuan is a medium-size Chinese developer that focuses in developing and managing properties in China’s Tier 1 and Tier 2 cities, with a strong presence in Guangdong province. Since 2012, the company entered a phase of fast growth with its contracted sales expanding to Rmb 25bn in 2016 from 5bn in 2012. We expect Aoyuan’s share price to outperform the sector due to 1) high earnings visibility from unbooked contracted sales; 2) high dividend yield; 3) low cost land bank in Tier 1/Tier 2 cities; 4) tightening policy may trigger industry consolidation and provide opportunity to replenish land bank at reasonable cost, given Aoyuan’s healthy balance sheet. With its strong unbooked contract sales reserve, quality land bank and strong execution, we forecast a contracted sales CAGR of 20%, revenue CAGR of 33%, net profit CAGR of 38% during 2016-2019e. With its accelerated asset-churn, we forecast ROE to expand to 18.3% in 2019e from 10.3% in 2016.

Price target HK$2.92, 22% upside; 7.1% dividend yield attractive

Our price target applies 60% discount to Dec-17 NAV. Aoyuan proposed Rmb 15 cents dividend per share for 2016, which represents a 7.1% dividend yield. The stock is trading at 67% discount to NAV, 4.1x 2017 PE and 0.56x 2017e PB, 0.22x 2016 contracted sales, at a deep discount compared to peers.

Industry consolidation benefits developers with healthy balance sheet

YTD the listed Chinese developers posted better-than-expected presales particularly in cities without sales restriction, which has driven the re-rating of the property stocks. We believe the re-rating is not over yet. With relative loose mortgage loans in lower tier cities, developers will continue de-stocking there. In core Tier 1/Tier 2 cities, tightening policies may trigger industry consolidation and create opportunities for Aoyuan to replenish land bank at reasonable cost. In the longer run, we still see more sustainable end demand for housing in core cities due to continued population inflow. Aoyuan has proven its track record in growing across policy cycles and accumulated extensive experience in acquiring land through equity/asset acquisition. This model could help accelerate asset-churn with projects launched at fast pace.

Strategic optimization of land bank in core cities at relatively low cost

Tier1/international cities and tier 2 cities accounted for 80% of Aoyuan’s land bank by land cost as of Dec-16. In 2016, Aoyuan further strengthened its land bank in core Tier 1/Tier 2 and international cities. Its average land cost was only Rmb 3,170 per sqm as of Dec-16, which gives it margin flexibility.

Improving credit profile reduces financing cost

With strong cash collection from property sales, Aoyuan’s net gearing has declined to 50.7% at Dec-16 from 64.0% at Dec-13. Its credit rating/ outlook were upgraded by all three international rating agencies in 2016/17. This effectively reduced its financing cost to 8.1% in 2016 from 11.4% in 2013.

Catalysts: New projects in core cities; inclusion in SZ-HK stock connect

New project announcement in core cities in China and overseas markets could further strengthen Aoyuan’s market position in these markets. Since Aoyuan’s market cap has passed HK$ 5bn, the company’s stock is likely to be eligible for trading through the SZ-HK stock connect program in June 2017.

Legal Disclosures

This article is only a summary (the “Summary”) of a published research report (the “Report”). It only includes part of the comments and views stated in the Report, which has been issued by Research Department of AMTD. The mentioned comments and views such as target price, company profit forecast, industry trend forecast, etc. are based on a series of preconditions and assumptions. Readers should study the full version of the Report issued in details so as to form a thorough understanding on the expressed comments and views.

The Summary is solely for AMTD clients’ information. A person will not be regarded by AMTD as its client solely because he or she receives this Summary. The contents of the Summary will not constitute investment recommendations to any person in any event. AMTD will not assume any legal responsibilities regarding any consequences or losses arising from the direct or indirect use of the Summary, or investment made accordingly.

The extracted valuations, forecasts and ratings in the Summary represents the judgments or opinions formed on the issuance date of the Report. The contents of the Summary may become inaccurate or invalid as a result of changes in circumstances or other factors subsequent to the issuance of the Report. AMTD is not obliged to update inaccurate or outdated information subsequently. Meanwhile, AMTD will not separately inform the readers of the Summary after updates have been made.

AMTD reserves the copyrights of the contents of the Summary. No part of the Report shall be forwarded, modified, quoted, copied or reproduced in any form by any mean to any other person without the prior written consent of AMTD. The Company retains all legal rights in this Report.