Radiance is a Top 40 national developer (RMB89bn sales in 2019) with key regions in Xi’an, Chongqing and Yangtze River Delta. Starting from Fujian, Radiance has been maintaining a strongly profit-over-scale strategy in the following areas: 1) Concentrated in profitable regions: As approaching RMB100bn sales, the Company only entered 30 cities with a total attributable land bank of over 29mn sq m, meaning 1mn sq m per city (vs. industry average of 0.6-0.7mn sq m). This translates into more deep-root and high-margin cities such as Xi’an and Chongqing with GP margin of >30%. 2) High attributable sales ratio at 75-80%: This is higher than the industry average of 65-70% to ensure the profits staying in the firm. 3) Exit North regions/Penetrate into Yangtze River Delta: From the land bank perspective, it has shifted towards Yangtze River Delta (now 17% of total). This is to take advantage of the regional development but more importantly ensure margin and cash flow safety, vs. gradually exiting regions like Tianjin and Liaoning province. As a result, we think the Company will enter a stage of high earning growth at 25% CAGR in 2020-2022E, higher than the industry.
- We expect sales to grow 16% CAGR in 2020-23E reaching RMB150bn: the reasons that it may outgrow the industry are 1) Abundant land bank of attributable 29mn sq m (total 40mn sq m) which is enough for 4-5 years. 2) Satisfying all three red lines by 2020E end so it has the flexibility to grow the debts by 15% per year, which means potentially higher growth in future sellable resources. 3) Higher sell-through rate as more sellable resources has been shifted from North (like Tianjin) to Yangtze River Delta which enjoys better demands. For the sales margin, we expect to be relatively stable at 25% as Xi’an and Chongqing’s high margins can provide cushions.
- Core earnings growing at 25% CAGR in 2020-23E with improving B/S: We expect 2020-22E revenue to grow 24% CAGR backed by 30% sales CAGR in 2017-2020E. Also GPM is estimated to recover to 25% level from 22% in 2019 (one-off impacts from Nanjing and Shanghai projects). After incorporating higher LAT, we expect core earnings to grow at 25% 2020-20E CAGR to RMB4.9bn in 2022E. For balance sheet, we expect the Company to meet all three red lines by 2020E with cash/short-term debt at 1.1, net gearing at 94% and total liability/total asset (after sales liability) to be 69%
- We initiate with Buy rating and TP of HK$5.55. We derive TP by applying 60% discount to its NAV per share at HK$13.87, equivalent to 4.8x 21E PE. It is trading at 3.7x 21E (vs. industry of 4.5x) at a yield of 6%. Key catalysts: 1) 2020E results in Mar 2021. 2) Property policy turns stable in 1Q21. Risks: Further industry tightening; Sales slowdown in Yangtze River Delta.
