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Shimao Property（813，HK）Lower-than-expected sales in H1, serious test will be faced in H2

Tuesday, August 26, 2008

5328

Shimao Property(813)

Recommendation on 26 August 2008
Recommendation	Buy
Price on Recommendation Date	$7.830
Target Price	$9.360

Weekly Special - 1361 361 DEGREES

Summary

In 2008H1, Shimao Property (Shimao or Company) achieved steady growth in property sales, the amount of sales contracts and contract sales area increasing 41.7% and 51.6%. In spite of rapid growth, property sales is below than our expectation, contract sales just accounting for 30% of annual sales target. We think that there will be great pressure on Companys sales in H2, cash flow facing serious test. Currently Companys stock price dropped sharply, which discounts over 60% than NAV. Now Companys stock price is in a reasonable interval, but lacking catalyst in short term. Considering the stock price fell overly currently, we give Shimao “buy” rating, target price at HK$ 9.36, 20% higher than current price.

Figure 1: The tendency graph Shimao compared to HSI

Source: Bloomberg Mark: the red curve referring to HSI movement

Sales performance achieved stable growth in 2008 H1, heavy pressure in H2

In 2008H1, Shimao achieved property contract sales RMB 4.38 billion, sales area 0.434 million sq.m., respectively increasing 41.7% and 51.6%. Shimao has launched 15 projects successively in H1, which located in Hangzhou, Kunshan, Changzhou, Wuhan, Yantai and many cities. Despite lower-than-expected sales, the Yangtze River Delta and Surrounding Bo Sea Area are still main pre-sale income source in H1. Hangzhou Shimao Riviera Garden, Kunshan Shimao Butterfly Bay, Wuhan Shimao Splendid River and Kunshan Shimao East No 1, achieved outstanding sale performance in H1. Shimaos development strategy successes, based on Shanghai in the Yangtze River and spread to surrounding area, and benefit was reflected initially.

Table 1: Sales performance in H1

By the end of June, 2008

Source: Companys announcement

Shimao will still face severe sale pressure in H2. Executives revealed that the Company will expend HK$ 8 billion for land purchase, repaying debt and re-investment in H2. At present Company holds capital of HK$ 3 billion, so property sale revenue should reach at least HK$ 5 billion to meet capital demand in H2, or Company will have to re-financing. We think that, according to the current sales situation, it is hard to achieve HK$ 17 billion sales target set in the beginning of the year, so adjusting sales target to HK$ 12 billion is more actual. So far at least, we think that completing sales target of HK$ 7 billion is hopeful greatly, and key to complete sales target in H2 lies in the sale of second-tier cities.

As planned, there will be more than 1 million sq.m. of supply for listing in H2. Shenyang Shimao Wulihe, Fuzhou Shimao Chating, Suzhou Shimao Canal Scene and Shanghai Shimao Riviera Garden will be included, as well as continue to offer existing projects, such as Nanjing Shimao Riviera New City, Kunshan Shimao Butterfly Bay, Shaoxing Shimao Dear Town, Wuhu Shimao Riviera Garden, Changshu Shimao The Center and Harbin Shimao River New City, etc.

Figure 2: projects profile of main second-tier cities (Unit: 10,000 sq.m.)

Source: Companys announcement

On public occasions, the management of Shimao is confident in market position and competitiveness, and recently chairman of Shimao, Hui Wing Mau, expressed that there is not promotion plan cutting price currently. We are not going to deny market competitive advantage of Shimao, but more willing to believe the managements words is a marketing strategy. In the current environment: sales remaining in the slump, high housing price and supply increasing greatly in H2, a flexible price strategy is perhaps a good choice company getting out of the troubles.

Restructuring plan approved, positive long-term effect.

Recently, Shimao announced that conditional approval has been obtained from CSRC for the transaction agreement in relation to the restructuring proposal between the Company and Shanghai Shimao Co.,Ltd (the “A share company”, 600823, SH). Nine project companies holding 10 commercial projects, plus Beijing Shimao Tower are confirmed to be injected in A Share Company, and A Share Company will be responsible for the development, sales and leasing business.After completion of the reorganization, core commercial properties assets of Shimao will be injected into A Share Company, and will hold 64.2% of the valid equity of Shanghai Shimao Co., Ltd directly and indirectly, really achieving its target entering A Share market. By mean of it, Shimao will integrate its property assets and widen the financing channels, which may effectively enhance the competitiveness of the Company. We think that if no unexpected events occur, the HK$ 1.2 billion involved in the assets injection will be booked in H2. Besides, Shimaos NAV will drop about 5%.

Risk

Global economy recession. At present, external dependency of China economy has reached more than 60%, the worsening external economic environment will directly affect Chinas economy. Now a number of developed economies have a recession or at the brink of recession, which will directly affect Chinas economy remains relatively higher external dependence and inhibit domestic demand indirectly. Purchasing demand for house slowing down will inevitably impact on company performance.

State macro-control policies. Recently China government has set forth a series of policies, such as strengthening the management of idle land, putting forward price-limited apartment and economical-affordable apartment and so on, which aims to strength the governments marketization management towards residential house and to make use of governments warfare housing policies to ease the housing demand. All these will have negative impacts to property companies relying on housing demand of marketization.

In addition, for its hard to apply visa for foreign visitors in the Mainland tourism during the Olympic Games, so hotel business performance in Mainland will be weak in Q3, increasing many uncertainty to hotel business in 2008.

Valuation

After estimates, NAV per share at the end of 2008 will reach HK$21.8. Currently Companys stock price discounts more than 60% than NAV in 2008, we think that, irrational selling made the stock price fell rapidly, which reflects investors pessimistic expectation towards development of the real estate sector and property company. In H2, the pressure the property company stock undersold will be heavy greatly, and we have not found the sign the fundamental of the sector and company improved as far. However, considering stock price dropped to a certain extend, there is great rebound probability. In addition, chairman of Shimao, Hui Wing Mau, overweighted 20.7 million shares in August, which appears higher safety margin. We give Shimao “Buy” rating, 6-month target price at HK$ 9.36.

Financial data

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