Introduction

Powerlong is a leading commercial property developer in China specializing in the development and operation of high-quality, large-scale, multi-functional commercial complexes.

Powerlong existing property projects are generally located in prime positions close to the city center of fast-growing, emerging cities in Fujian Province, Jiangsu Province, Shandong Province, Henan Province, Tianjin, Chongqing, Zhejiang Province, Anhui Province and Jilin Province.

Summary

For good marketing position and implementation capacity, Powerlong's sales in 2010 exceeded our forecast. Because there are more floors for sale, so more sales can be forecasted. However, for more serious regulation policies, there will more uncertainties in completion of target in 2011 of 11billion.

The company has a unique operating model of developing comprehensive commercial property with both renting and selling, keeping high financial margin, and the company will maintain high gross margin and low land cost.

Given its unique operating model and good expansion in the future, we give it 8xPE based on 2011 core profit, 12m TP at HK$2.96, 12% higher than current price. We recommend a hold rating.

Sales in 2010 has exceeded our forecast

Powerlong's sales in 4Q2010 exceeded our forecast. For good marketing position and implementation capacity, its contract sales in December rose by 38% MoM to RMB 1.85billion, recording its high level by three consecutive months. In the year, the company's sold GFA increased by 121% YoY to 0.87million sq.m., contract sales increased by 115% to RMB 6.3billion, residential properties and commercial properties accounting for about 62% and 38% respectively. There are more certainties on profit in 2011-2012 when the company was in excess of sales in 2010.

When entering 2011, Powerlong kept its good sales trend. In January, 2011, the company completed sold GFA of 65K sq.m., sales reached 414million, up 196% YoY. Because there are more floors for sale, so more sales can be forecasted. However, for more serious regulation policies, there will more uncertainties in completion of target in 2011 of 11billion.

The company owns investment property of 120K sq.m. for lease and its rent only amount 3% of its turnover at present. Given gradual increase of self-owned investment property and stable increase of commercial property rent, we think, the fair value premium of investment property and rent thus brought will give strong support to its performance. We expect the rent will be over RMB160million in 2012, 5% of its turnover by then.

Unique operating model

The company has a unique operating model of developing comprehensive commercial property with both renting and selling. While maintaining its operating cash flow by selling residential buildings and some commercial property, it secures high margin and stable performance with self-owed commercial property rent and hotels operated by top management groups.

Selling business supports its main revenue at present and also provides cash flow for its operating model. Its self-owned property renting and hotel only contribute 3% to its revenue and hasn`t give a strong support, for still not reaching the full harvest stage.

Powerlong's operating model is featured with setting foot in 2nd &3rd tie cites with high growth and relying on local government to integrate “Powerlong City Plaza” with new district building of the city. At present, 17 “Powerlong City Plaza” in 14 cities domestic are under construction, among which projects in Fuzhou, Qingdao and Zhengzhou have achieved success in operation.

This cooperation model is based on a win-win result that taxation, job chances and investment are created in large for these cities with Powerlong City Plaza development and Powerlong obtains land with relative good location in low price and tax preference.

Land cost kept low

In 2011 Powerlong strengthened its land acquisition. In 2010 the company acquired new land amounted to 2.1million sq.m., and its land bank totaled 8million, average land cost at 800 Yuan per sq.m.. In the future Powerlong will strike to acquire the land in the second and third tier cities, and will enter the first tier cities by chance. We believe that the company will keep low land cost, and gross profit margin will keep high level between 45% and 50%.

Benefiting from good sales in 4Q2010, net debt ratio is expected to below 40%. Currently the company has held cash of more than 4billion, enjoying high financial safety margin.

Risk

Projects construction progress may slow down for some unforeseeable factors.

Selling and renting business in future still have challenges.

Valuation

We estimate its net profit will be RMB2.072 billion and 2.242billion in 2010 and 2011 respectively, and EPS will be RMB0.50 and RMB 0.55, and core EPS will be RMB0.26 and RMB 0.32, representing to HKD 0.30 and 0.37.

Given its unique operating model and good expansion in the future, we give it 8xPE based on 2011 core profit, 12m TP at HK$2.96, 12% higher than current price. We recommend a hold rating.

Financials

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