Summary

Interim performance of R&F basically was line in with the forecast, revenue and net profit rose by 58% and 186% YoY. However, for sector regulation, the sales in 1H2011 were lower than our forecast. We expect that sales in 2H2011 will accelerate, but there are not enough signs to prove that the company can complete the sales target of RMB40billion as planned.

Strong controlling policies will have negative effect on capital investment and sales growth, but for higher market shares and adjusted product structure, the company will keep stable. According to our estimation, its revenue in 2011 and 2012 will be 30.8billion and 35.7billion, and net profit will reach 4.66billion and 5.32billion.

We consider that under the condition of weak sales in1H2011, R&F will be hard to enjoy the average valuation of the sector. Therefore, we give R&F `Hold` rating, 12m TP at HKD 9.8, representing 5.6x P/E on expected EPS in 2011.

Total revenue and net profit rose by 58% and 186% YoY respectively

In 1H2011 total turnover of R&F rose by 58% YoY to RMB10.98 billion, and profit attributable to owners increased significantly by 186% to RMB2.01 billion. The good result arose from the careful execution of its business plan: the company delivered a total saleable area of 724,000 sqm on schedule, representing approximately 25% of the estimated full year delivery while further improving gross margin; maturing hotel operation saw momentum added to revenue growth from the hotels; and an expanded investment property portfolio pushed the rental income upwards.

Turnover and profit from the company’s core business of property development for sale increased by 62% and 269% respectively reaching RMB10.07 billion in turnover and RMB2.03 billion in profit. The company’s other key business segments, hotel operations and property investment, achieved significantly better results than in the same period last year; hotel revenue jumped by 37% and achieved EBITDA of RMB91.9 million, while income from property investments increased by 32% to RMB210.3 million.

Revenue and core profit from property development increased by 62% and 269%

Turnover increased by 62% to RMB10.07 billion, from RMB6.22 billion in the same period in 2010. Turnover in Guangzhou amounted to RMB4.43 billion, up from RMB2.80 billion; this was mainly derived from the aforementioned commercial projects but also included RMB337 million in turnover from the residential project R&F Jingang City, the other main project sold in the period. The average selling price for R&F Jingang City increased by approximately 19% to RMB6,200 per sq.m. The average selling price for Guangzhou as a whole increased by 88% to RMB21,500 per sq.m. Of the makeup of this turnover, most significant was RMB554 million from Hainan R&F Bayshore, and RMB417 million from Taiyuan R&F City.

Overall gross margin for the period was 49.1% as compared to 32.1% in the same period in 2010. The high profitability of the projects in the Pearl River New Town led directly to significant improvement in the gross margin. The top-selling project, Guangzhou R&F Yingzun Plaza, accounted for 26% of the company’s turnover and registered a gross margin of 55%. The other projects in that area had similar gross margins. In fact, as much of the turnover recognized for the period arose from contracted sales made when the market was booming, gross margin for all cities increased, the only exception being Chongqing where the average 8 selling price of the city’s main project, Chongqing R&F City, experienced a downward adjustment of approximately 5%.

Just only 41% of sales target has been completed in the first 7 months

In the first 7 months of 2011 R&F completed contract sales of RMB16.5billion, mainly contributed by projects in cities including Guangzhou （29.5%）, Beijing （24.2%）and Tianjin（16.7%）. And sold GFA totaled 1million sqm, ASP at RMB15793/sqm. This apparent lag in contracted sales was by no means an indication of sales under-performing as compared to the plan, but merely a result of the timing of the securing of pre-sale permits and project launches. With 10 new projects to be launched in 2H2011, sales in 2H will accelerate but with cautious completing rate. In our opinion, it’s hopeful that 85% of full-year sales target will be completed because of promoting supply and price adjustment, but there are not enough signs to prove that the company will complete the previous sales target of RMB40billion.

Risk

Sales may be lower than forecast.

Valuation

Strong controlling policies will have negative effect on capital investment and sales growth, but for higher market shares and adjusted product structure, the company will keep stable. According to our estimation, its revenue in 2011 and 2012 will be 30.8billion and 35.7billion, and net profit will reach 4.66billion and 5.32billion.

We consider that under the condition of weak sales in1H2011, R&F will be hard to enjoy the average valuation of the sector. Therefore, we give R&F `Hold` rating, 12m TP at HKD 9.8, representing 5.6x P/E on expected EPS in 2011.

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