【Company Research】Poly Property Development (6049 HK) – Utilizing the benefits of Parent Group

• 49% earnings growth in FY19. Driven by increased business scale, Poly PD recorded a revenue of RMB5,967mn in FY19, up 41% YoY. Overall gross margin was stable at 20.3% (FY18: 20.1%). Net profit grew 49.3% to RMB491mn, representing net margin of 9.8%. Net profit was 4% below our forecast of RMB511mn, mainly due to the growth of PM segment revenue which was below our expectation (est. 54% vs. act. 32%). 

 

• Robust PM business. By end-FY19, Poly PD had a contracted GFA of 498mn sq m, and a managed GFA of 287mn sq m, an YoY increase of 137mn sq m and 96mn sq m, respectively. The Company now covers 170 cities across 29 provinces. Poly PD has been actively expanding to third parties market. Amid the 498mn sq m contracted GFA, 210mn sq m are attributed to the Parent Company, Poly Development (600048 CH, BUY), and 288 mn sq m are attributed to third parties. Public PM is the key niche market to Poly PD. Poly PD utilizes the benefit of SOE and Poly Group background in acquiring public projects. In public PM market, SOEs like Poly PD and COPH (2669 HK BUY) have clear advantage over other non-SOE PM companies. Amid 287mn sq m managed GFA, 139mn sq m are public projects (48% of managed GFA).

 

• Huge potential in VAS. The Company’s VAS-to-non-homeowners mainly comprises of pre-delivery services, which account for 81% of the segment revenue. Pre-delivery services mainly assist with developers’ sales and marketing activities at property sales venues and display units. The Parent Company, Poly Development is one of the largest developers in the market with RMB461.8bn sales in FY19. We believe Poly PD could discover more business opportunities with the Parent Company other than pre-delivery services. Community VAS grew 85% to RMB1,154mn in FY19, accounting for 19.5% of total revenue and 39% of total gross profit. Poly Development is a large tie 1/core tier 2 cities focus developer. Thus, Poly PD has a strong foothold in these developed regions in which community VAS can enjoy a bigger market and stronger spending power of customers.

 

• Strong cash position, Maintain BUY. Poly PD successfully raised HK$4.7bn during the IPO in Dec 2019. By end-FY19, the Company had RMB6.5bn cash on hand, approx. 21% of mkt cap. These cash could bring opportunities including M&A, investment in new community VAS, setting up JVs with local government in mixed ownership reform and innovative business, etc., making sure its leading position in market. Furthermore, a big investment, for example a large M&A deal, can excite the market, creating a stock price catalyst. We raise our earnings forecast for FY20/21E by 1.9%/6.3% to RMB724mn/RMB947mn.  We maintain our TP unchanged and Maintain BUY.