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Shimao Property Holdings (0813.HK) -- Assets injection into Shanghai Shimao, company structure optimized

Friday, November 2, 2007

5662

Shimao Property Holdings(813)

Recommendation on 2 November 2007
Recommendation	Buy
Price on Recommendation Date	$24.350
Target Price	$28.850

Weekly Special - 1024 Kuaishou

Summary

Shimao Property Holdings Limited (“Shimao Property”) announced on 23rd that it will inject into Shanghai Shimao Stock Co., Ltd (“Shanghai Shimao”) its 11 commercial property projects, afterwards, Shanghai Shimao will become the indirect affiliated company of Shimao Property, with Shimao Property holding 64.2% shares of Shanghai Shimao. We think the impact of this transaction is positive and it will help to enhance the asset quality of Shimao Property. Therefore, we will raise Shimao Property’s 12-month target price to HK$28.85, 18% higher than current price.

Main transaction items

According to the Agreement, Shimao Property will inject into Shanghai Shimao several retail and commercial property projects, amounting to about RMB7.676 billion net assets, in exchange for its subscription of Shanghai Shimao’s new 630million A shares with issue price at RMB12.05 per share. In addition, Shanghai Shimao will issue 62,24million new A shares to Shimao Enterprise, another new affiliated company of Shimao Property.

After the transaction, the two company’s business will be differentiated in more details. Shimao Property will focus on rapid growing business: residential business and hotel development business.

Shanghai Shimao will concentrate on domestic commercial real estate business (excluding hotel and residential and hotel affiliated commercial facility ), including development, operation, sales and rental of shopping center, grand mall, commercial street, theme mall, special market, wholesale market, discount shops, factory outlets, entertainment commercial properties, office buildings and so on, and gradually it will quit residential business and will be developed into a specialized commercial real estate company.

Asset transfer details

According to the company’s announcement and calculated by way of net asset value of transferred assets, the total cost of transferred assets was RMB76.652million, among which around RMB6.724billion of target shares was paid through new A shares subscription, and target assets were paid through RMB 868million new A shares and 74million cash or cash equivalent.

During this asset transfer, Shanghai Shimao needs to issue around 6.922billion new A shares with subscription price at RMB12.05 per share (the subscription price is calculated by way of average close price of first 5 trading days till Oct 19th, 2007 to deduct 53.1%)

However this newly issued A shares cannot be sold in 36 months.

Optimize financial quality

Upon completion of this transaction, Shimao Property is expected to receive RMB1.213billion interests and net asset value per share will be improved, however the actual receivable interests will be confirmed after the transaction is completed. Till this report date, the close price of Shanghai Shimao (600823.SH) was RMB20.87, 73.2% higher than asset acquisition price. If the transaction is completed successfully, NAV per share of Shanghai Shimao will be significantly improved. According to the company’s forecast, NAV per share in 2007 will be raised from RMB 2.044 to RMB5.514.

As Shimao Property is the stock controlling company of Shanghai Shimao, NAV per share of Shimao Property will be improved, and it will rise from current HK$22.51 to HK$25.09.

The newly released 2007 Q3 report showed Shimao Property is undergoing stable performance growth, its first 9 months’ sales volume has reached 78% of whole year’s sales target, which is in line with our previous forecast.

Therefore, we believe the group will still maintain satisfactory growing speed in future. On basis of NAV HK$25.09 per share, we will give Shimao Property 12-month target price HK$28.85, 15% higher than current net asset value, 18% higher than current price HK$24.35, 19 times of EPS in 2008.

Financial data

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