We met management last week and updated with them on the latest development. We believe that acquisition Kinghand would strengthen its land bank while spin-off of China Cultural Tourism would enhance valuation. Contracted sales started to pick up in Apr and we believe Aoyuan can achieve its full year sales target of RMB132bn in 2020 (up 12% YoY) and target RMB200bn sales in 2022. We maintain our forecast and TP unchanged. Reiterate BUY and it remains one of our top picks.
- Acquire 29.3% of Kinghand Industrial (000615 CH). In Apr, Aoyuan announced to acquire 29.3% stake of Kinghand Industrial from its controlling shareholder, Mr. Tian, in total consideration of RMB1.16bn. Completion of acquisition is pending for authority approval. Kinghand Industrial is engaged in property development and manufacture of bio-based fibre materials and products. Revenue and net profit of Kinghand amounted to RMB3.15bn and RMB12.1mn in 2019, respectively. Aoyuan targets Kinghand for its land bank. Kinghand has around 18 projects with total saleable GFA of 1.24mn sq m in Beijing, Tianjin, Chongqing, Chengdu, Nanjing, Taiyuan, Guangdong Province and Hebei Province.
- Spin off cultural tourism property business. After successful spin-off of Aoyuan Healthy (3662 HK, NR) in Mar 2019, Aoyuan’s associated company (28% interest), China Cultural Tourism Group Ltd is applying for listing on HKEx. China Cultural Tourism is engaged in the development of vacation properties in its cultural tourism destinations in Jiangmen and other locations in Guangdong Province. As at Feb 2020, land bank of China Cultural Tourism amounted to 1.6mn sq m. Furthermore, revenue and net profit of China Cultural Tourism were RMB736mn and RMB104mn in 2019, respectively.
- Contracted sales declined 9% YoY in Apr. Due to impact from COVID-19, contracted sales amount declined by 18% to RMB23bn in 4M20, representing a 17% hit rate of full year target of RMB132bn. However, we saw sales started to improve and amounted to RMB8.7bn in Apr (up 20% MoM). We are confident that it can accomplish the full year sales target and it aims to reach RMB200bn in 2022.
- Reiterate BUY. By end-19, pre-sold and unbooked properties amounted to RMB170.5bn with estimated gross margin of 26-28%. Meanwhile, there may be some gains from redevelopment projects. We are confident about its future earnings growth. We maintain our net profit forecast of growing by 51.5% to RMB6.37bn in 2020 and 16.2% to RMB7.40bn in 2021. We also maintain target price unchanged at HK$15.48, which is equal to 50% discount of end-20 NAV estimate (i.e. HK$30.95 per share). Maintain BUY. Reaffirm as one of our top picks in the sector.
