Introduction

SUNAC China is an integrated residential and commercial property developer. To date, the company has engaged in project developments in the cities of Beijing, Tianjin, Chongqing, Wuxi, Suzhou and Yixing, which are currently in different phases and has covered a diverse range of property types, such as high-rise and mid-rise residences, detached villas, townhouses, retail properties, offices and car parks.

Summary

SUNAC has clear market position, which is becoming high-end property developer. By the end of September 2011, SUNAC has made year to date sales amount of RMB 13.5billion (including the contract sales value of RMB 11.1 billion and the pre-sales value of RMB 2.4 billion respectively), which is 122% increase comparing to the same period last year and 75% of full-year sales target of 18billion, the sales area is approximately 846,700 sqm with the average selling price of RMB 15,944 Yuan per sqm. We think, the company has enough property supply and with high completion rate, so SUNAC will hit the full-year sales target in advance.

The interim report showed that revenue and net profit of SUNAC in 1H2011 increased significantly. Revenue rose by 67.8% YoY to 1.326billion, and net profit rose by 66.8% YoY. The company's revenue from property development rose 64% YoY to 1.26billion, mainly because booked ASP soared by 44%.

In the period, its liability ratio rose significantly. The gearing ratio rose from 24% in 2010 to 47%, and net debt to equity ratio soared from 37% to 97.8%. In current surrounding, liability ratio of SUNAC rose significantly for its strategy, but its cash flow may keep healthy for hitting the sales target as planned. We think that the company will keep high liability level but with limited financial risk.

We estimate that SUNAC's operating profit margin in 2011 to 2013 will be 42.47%, 42.03% and 41.04%, and net profit margin will be 26.45%, 25.2% and 24.78%. We consider that the company's CAGR of net profit in coming three years will be 32.7% with more projects to be completed. Therefore, the company's net profit in 2011 to 2013 will be RMB 2.254billion, 2.923billion and 3.609billion respectively.

According to our forecast, SUNAC's NAV at the end of 2011 will be HKD8.62. Considering NAV discount of middle-sized developers and CAGR of net profit in coming three years, we give SUNAC “Buy” rating, 12m TP at HKD2.22, 35% higher than current price.

High-end development position and sharp increasing sales

SUNAC has clear market position, which is becoming high-end property developer. The company focuses on high-end property development and management business to promote its grand, the company may also get higher profitability and ROE through higher ASP.

Currently SUNAC still focused on development of real estate properties in six cities of the PRC, namely Beijing, Tianjin, Chongqing, Wuxi, Suzhou and Yixing. By the end of September 2011, SUNAC has made year to date sales amount of RMB 13.5billion (including the contract sales value of RMB 11.1 billion and the pre-sales value of RMB 2.4 billion respectively), which is 122% increase comparing to the same period last year and 75% of full-year sales target of 18billion, the sales area is approximately 846,700 sqm with the average selling price of RMB 15,944 Yuan per sqm. We think, the company has enough property supply and with high completion rate, so SUNAC will hit the full-year sales target in advance.

Booked ASP soared

The interim report showed that revenue and net profit of SUNAC in 1H2011 increased significantly. Revenue rose by 67.8% YoY to 1.326billion, and net profit rose by 66.8% YoY. The company's revenue from property development rose 64% YoY to 1.26billion, mainly because booked ASP soared by 44%.

In the period, booked ASP rose from 10538 per sqm in 1H2010 to 15152 in 1H2011, growth at 44%. The reason was that booked GFA in the first tier cities rose, and the increased GFA of commercial properties and villa promoted booked ASP. Moreover, gross profit margin dropped from 50% in 1H2010 to 48.7% in 1H2011.

Liability ratio rose significantly

In 1H2011, SUNAC's net finance costs increased by RMB1.1billion, or 157%. This increase in net finance costs was mainly attributable to (i) a larger amount of average borrowings to primarily finance our increased property development activities for the six months ended 30 June 2011 and (ii) a higher weighted average effective interest rate for the six months ended 30 June 2011 principally because of the higher interest rates under the tighten monetary policy of central bank.

The company's cash and cash equivalents decreased by RMB20.8billion or 48.9%, to RMB21.7billion as of 30 June 2011, from RMB42.5billion as of 31 December 2010. This decrease was principally attributable to the cash outflow in operating activities as a result of payment for land grant fees, taxes and the other expenditure in relation to our increased property development activities.

When cash decreased, the company's debts kept increasing. Its debts at the end of June increased by 1.26billion to 6.95billion, while net debts soared by 195% to 5.1billion. Therefore, its liability ratio rose significantly. The gearing ratio rose from 24% in 2010 to 47%, and net debt to equity ratio soared from 37% to 97.8%. In current surrounding, liability ratio of SUNAC rose significantly for its strategy, but its cash flow may keep healthy for hitting the sales target as planned. We think that the company will keep high liability level but with limited financial risk.

Development strategy

SUNAC's strategy of land acquisition is clear, which focus on timing and land quality to gain higher profit. According to statistics, the company's GFA of land bank totaled 6.83million sqm, and GFA available for selling was 6.41million. And the land bank was located in Bohai Bay area (37.56%), Chongqing (32.51%) and Southern Jiangsu (29.92%). In our opinion, expanding stably, developing deeply in the three economic circles and promoting profitability of project will be main development strategy of SUNAC in the future.

Profit forecast

We estimate that SUNAC's operating profit margin in 2011 to 2013 will be 42.47%, 42.03% and 41.04%, and net profit margin will be 26.45%, 25.2% and 24.78%. We consider that the company's CAGR of net profit in coming three years will be 32.7% with more projects to be completed. Therefore, the company's net profit in 2011 to 2013 will be RMB 2.254billion, 2.923billion and 3.609billion respectively.

Risk

Sales may slow down significantly.

Liability ratio may keep rising.

Valuation

According to our forecast, SUNAC's NAV at the end of 2011 will be HKD8.62. Considering NAV discount of middle-sized developers and CAGR of net profit in coming three years, we give SUNAC “Buy” rating, 12m TP at HKD2.22, 35% higher than current price.

Financials

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