【Company Research】Yuzhou Properties (1628 HK) – RMB100bn sales milestone in 2020

• 4% core earnings EPS growth in FY19. In FY19, revenue was down 4% to RMB23.2bn due to less projects consolidated in FY19 to keep up the scale of total contracted sales. Gross margin also dropped from 30.7% to 26.2%. Thus, gross profit decreased by 18% to RMB6.1bn. On the other hand, the Company recorded RMB1,656 gain from sale of subsidiary and JCE, and effective tax rate also dropped 4.8ppt to 39.9%. As a result, core profit still achieved 17% growth to RMB3,987mn, which is slightly above our forecast of RMB3,900mn. However, due to enlarged share capital caused by the 1H19 scrip dividend option, core EPS only grew 3.8% to RMB0.81. After a 1H19 special interim dividend, Yuzhou declared another FY19 special final dividend, representing FY19 full year core payout of 46%, including 10% special payout.

 

• Targeting RMB100.0bn sales in 2020. In FY19, the Company achieved RMB75.1bn contracted sales with 4.97mn sq m GFA sold, up 34% and 34%, respectively. YRD remains the core market of Yuzhou, contributing 65% of total sales. Yuzhou’s FY20 sales target was RMB100.0bn. Saleable resources amounted to RMB180.0bn, indicating target sell-through of 56%. The management admits the disease outbreak has adversely affected the sales in in 1Q20. But the management is confident of catching up in in the rest of FY20. 56% sell-through target is not demanding. With tier1/tier2 accounts for over 90% of FY20 saleable resources, we believe RMB100.0bn is achievable.

 

• Quality land bank. In 2019, Yuzhou acquired 4.62mn sq m new land bank with saleable resources of RMB100.4bn, tier1/tier2 cities account for over 95%. By end-FY19, total land bank of the Company reached 20.12mn sq m, with aggregate saleable resource of RMB366.1bn, expecting ASP of RMB18,196/sq m. YRD/GBA/Bohai Rim/West Strait accounts for 43.3%/6.2%/18.2%/21.3% of total land bank. Furthermore, 86% of the land bank are in tier1/tier2 cities. The Company’s land bank layout is attractive among mid-to-small size developers.

 

• Looking forward to accomplishing milestones in FY20.  Due to margin decline and enlarged capital, we trim FY20/21 EPS by 19%/21% to RMB0.84/1.01. We derive our end-FY20 NAV forecast at HK$9.62 per share. Given 50% discount, we trim our TP from HK$5.28 to HK$4.81. The management has revealed a possible spinoff of its PM business as soon as end of FY20. If RMB100.0bn sales and spinoff plan are both accomplished in FY20, we believe, they would boost market confidence in Yuzhou. After the RMB100.0bn sales, the management reveals it will focus more on the attributable interest, which could enhance the earnings quality and financial visibility. The counter is trading at 3.4x/2.8x FY20/21E P/E, with dividend yield of 10.6%/12.8% in FY20/21E, according to our estimates. The Company has a good quality of land bank and current valuation is undemanding. With catalysts we mentioned above, we maintain BUY rating.