EUR 850.00 For Business Accounts Only

Morningstar | Upgrading Shimao FVE on Strong Year-to-Date Contract Sales

We are upgrading our fair value estimate for Shimao Property to HKD 25 per share from HKD 22 as a result of the company's strong sales year to date. The sales performance has outpaced most of the sector peers. We still believe the property market is near the tail end of a growth cycle, but given Shimao's sales momentum as well as the expansion of its operational scale, we expect the company to book strong earnings growth over the next two to three years. Our updated fair value estimate is 8 times projected earnings and 1.2 times book value. We maintain our no-moat rating.

Year to date, the company achieved contract sales of CNY 72 billion, up 60% year on year. The increase was entirely driven by higher gross floor area sold as the average selling price was flat. We adjusted our full-year contract sales to CNY 150 billion, ahead of the company’s target of CNY 140 billion. On the revenue booking side, we increased gross margin from a flat 30% to 31% and 32% for 2018 and 2019, respectively. We also increased our assumption for the land appreciation tax. Both adjustments reflect the large increases of average selling prices of 14% and 20% recorded in 2016 and 2017. To account for the larger scale of operation as well as higher employee compensation, we increased our assumption on selling, general, and administrative expense. The aggregate effect of the changes led to our earnings estimate decreasing 5% for 2018 but increasing 15% and 14% for 2019 and 2020, respectively.

The company is geared for expansion over the next few years, as evidenced by the strong contract sales and land acquisitions year to date. However, we maintain that the property market is at the tail end of a strong easing cycle, which started in late 2015. For the commodity residential market, sales were up 22% and 36% by GFA and value in 2016 and 5% and 11% in 2017. During the first half of 2018, sales were up 3% and 15%. Prices rose during the year because of very low inventory levels. Given the successful destocking over the past two years, the government is pushing ahead to remove certain easing measures related to the real estate sector, in particular scaling back the pledged supplementary lending program, which was channeled through China Development Bank for the funding of shantytown redevelopment projects. We expect the property market to end the year with flat volume and a single-digit price increase.