【Company Research】Logan Property (3380 HK) – Key stock for investing in GBA

• 43% core earnings growth in FY19. Although sales of properties only recorded 5.4% growth in FY19, construction business, rental income and primary development business achieved 176%, 41.4% and 359% growth respectively during the year, driving the overall revenue up by 30.2% to RMB57.5bn. Due to less high margin projects delivered in FY19, gross margin of development properties dropped from 36.0% to 30.7%. As a result, gross profit of development was down 10% YoY. But thanks to the strong growth of other high margin business in FY19, overall gross margin only declined 2.2ppt to 31.5% and overall gross profit still achieved 22% YoY growth. With reduced effective tax rate (from 35.8% to 33.7%) and minorities deduction (from 7.9% to 2.5%), core profit achieved 43% growth to RMB10,020mn, which is in line with our forecast of RMB9,947mn.

 

• Targeting RMB110.0bn attributable sales in FY20. In FY19, the Company achieved RMB96.0bn contracted sales with 6.92mn sq m GFA sold, up 34% and 57%, respectively. Attributable sales was RMB91.5bn, representing attributable interest of 95%. High attributable interest is one of the highlights of Logan. Logan sets its FY20 sales target at RMB110.0bn (attri.) with saleable resources of RMB180.0bn, indicating the target sell-through is over 60%. Furthermore, 60% of the saleable resources are in GBA. Logan continues to be a GBA focus developer.

 

• Urban redevelopment in GBA is the key investment thesis. As of end-FY19, Logan held a total land bank of 36.67mn sq m, with est. RMB431.4bn saleable amount. Land bank in GBA reached 22.3mn sq m (61% of total land bank) with est. RMB305.6bn saleable amount (71% of total saleable amount). Furthermore, Logan had 21.34mn sq.m M&A/urban redevelopment projects in the pipeline, where saleable resources amounted to RMB400.6bn and 95% of urban redevelopment projects are in GBA. Conversion of these valuable urban redevelopment projects has become Logan’s crucial channel of land replenishment. Urban redevelopment targets to contribute 20% of core profit annually in next three years.

 

• Raise TP and maintain BUY.  The Company is aiming to achieve 20% CAGR in next three years. We revise up FY19/20 core earnings forecast by 2.2%/15.3% to RMB12,074/14,564mn. We view Logan as a key stock for investing in GBA. After recent plunge of market, current valuation of Logan is undemanding with 4.8x/4.0x FY20/21 P/E and 8.3%/10.1% FY20/21 yield. We derive our FY20-end NAV forecast at HK$29.00 per share. We raise our TP from HK$13.10 to HK$14.50, which is equivalent to 50% discount to NAV. Maintain BUY.