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Sino-Ocean Land Holdings Limited (3377, HK) Adjusted annual sales target completed, 2009 sales

Wednesday, December 10, 2008

5804

Sino-Ocean Land Holdings Limited(3377)

Recommendation on 10 December 2008
Recommendation	Hold
Price on Recommendation Date	$3.450
Target Price	$3.100

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Summary

Sino-Ocean is one of the largest property companies in Beijing and also is a large state owned company listed in share market. COSCO and Sinopec are the two largest shareholders of Sino-Ocean, holding 21% and 14% shares respectively. Sino-Ocean recently announced that it has achieved more than 5 billion sales revenue this year, completing its annual sales target. We think after the annual sales target is adjusted lower, completing the new sales target is in line with the expectation and it also helps to promote investor`s confidence. In 2009 the sale of Sino-Ocean will be faced with tough challenge, its performance will be more uncertain. We give Sino-Ocean “Hold” rating and estimate its 12-month target price at HKD3.1, 10% lower than current close.

2008 sales target completed, 2009 sales in challenge

Sino-Ocean has completed over 5 billion sales revenue, this is the first property company achieving sales target this year. However, impacted by recessed property market, achieving sales target actually is the result of sales plan cut 30% down. In Sept this year, the company management reduced the 2008 sales target from 8 billion to 5 billion, 2009 sales target also down from 14 billion to 10 billion, meanwhile, estimated sales area also down to 900K sq.m.. The reduced 2008 target is achieved; this is in line with our expectation. We forecast Sino-Ocean in 2008 will achieve 6.5 billion of sales revenue, mainly come from Beijing, Zhongshan and Shenyang.

In 2009 Sino-Ocean will be faced with severe challenge. Currently the residential property sales volume in Beijing slips 50% down y-o-y. Though the central bank cut benchmark interest rate 108 points down and the contract sales volume went up, the sales of commercial properties in a whole still seems run-down. Sino-Ocean will have several projects to sell in 2009, including Ocean Landscape, Ocean Honored Chateau, Ocean Great Harmony and etc which will be launched one by one. According to our judgment, the housing demand is very uncertain, it will not construct effective backup to its 2009 sales revenue. We are prudent toward next year`s Beijing property market and the sales performance of Sino-Ocean.

It is worth mentioned that among Sino-Ocean`s GFA for sale in 2009 there is price-limited apartments and cheap-rented apartments. These apartments will be sold to the public and local government at relatively low price. As the welfare housing demand is strong, it will contribute fast cash inflow to the company. However, it will meanwhile affect the company`s gross margin.

Acquired assets against market, land bank totaled 11.78 million sq.m.

On November 27th, Sino-Ocean announced that it will purchase Dalian Tsanghao Real Estate Company by means of issuing new shares and cash payment, at cost of RMB 1.2 billion, among which 720 million will be paid through shares issuing and 480 million will be paid in cash. Xiang Song Project, Xishan Project and Hong xing Project in Dalian city are the core assets of Tsanghao Real Estate Company.

Strong background of its main shareholders provides significant support for Sino-Ocean to undergo large scale of acquisition though the property market is in adjustment cycle. The contribution of these three projects to the company is limited in short term, but the implication is more about its strategy applied. We think cost of RMB 1.2 billion is reasonable basically, payment through share issue and cash payment help to ease the capital pressure of Sino-Ocean under current market situation.

Though market slacked, Sino-Ocean used several methods to expand land bank. Since 2008, Sino-Ocean totally purchased 7 pieces of land, GFA exceeding 1.7 million sq.m., mainly located in Surround Bo Sea Area such as Beijing and Dalian. So far, the total land bank of Sino-Ocean reached 11.78 million sq.m..

Risk

Currently the company is mainly facing systematic risk from external environment. The deteriorating international economic situation and slow down of domestic economy both contributed negative impacts to the company`s business in mainland China and HK and Macau. Recently though global wide market saving measures help to ease the current tight economic situation, the down trend of cycle industry is difficult to turn around. The systematic risk will still exist in a rather long time.

Valuation

On Nov. 26th, the central bank largely cut the deposit and lending benchmark interest rate down 108 points. This has positive impacts on the property market. Firstly, it reduces the financial cost of property companies and has positive impacts on their performance. Secondly, the cut of lending ratio will boost public enthusiasm to purchase residential apartments. We think Sino-Ocean is benefited by this new measure, but the effect is limited. Currently we still do not witness any fundamental improvement of the property market.

We estimate the EPS of Sino-Ocean in 2008 and 2009 will be 0.26 and 0.32 Yuan, book value per share to be 3.8 and 4.1 Yuan. We think the macro economy and property market in 2009 will both continue its cycle adjustment, the market capital is still not sufficient. Shares of property market will be traded at relatively low value. According to market evaluation, the evaluation of Sino-Ocean is slightly higher for the moment. We think 8 times of P/E in 2009 and 0.8 times of P/B in 2009 will be the key trading index for Sino-Ocean in the coming one year. We estimate its 12-month target price at HKD 3.1, 10% lower than current close and give it “Hold” rating.

Financial data

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