As born (Wenzhou) and deep rooted in YRD region, Dafa has achieved a fast growth of >50% CAGR in 2018-20 to exceed RMB30bn sales. With sales growth remaining the key (+15-20% YoY in 2021E), we think Dafa will also focus on ROE and funding rate improvement via optimizing asset turnover, enhancing cash collection rate and clearing inventories. This would provide more margin upside and healthy B/S in the long run to fuel the earnings growth. Initiate with Buy.
- High concentration on YRD region to benefit from the booming demand. Dafa has a total land bank of 6.5mn sq m/RMB91bn saleable resources (attributable 47%) with 84% located in the YRD regions (Wenzhou, Ningbo, Suzhou, Nanjing, etc.). We expect the Company to deliver 15-20% sales growth in 2021E to RMB35bn, > industry of 10% on its booming regional demand and debt advantage after meeting all “three red lines” by end-2020.
- “High asset turnover” approach to support expansion: With only 2-2.5 years of land bank life, the Company still achieved a fast growth of >50% CAGR in 2018-20. Besides lower attributable ratio (from 60% in 2018 to 45% in 2020), the main reason behind is its consistent “high asset turnover” strategy (<12 months from land acquisition to cash flow breakeven) in the following ways: 1) Focus on YRD market as the demand side is more consistent than other regions. 2) Rely on public bidding channel for its land resources (100% in 2020). 3) JV with market leaders like Country Garden to further optimize. The drawback might be the limited margin upside given the increasing land price, but we think the amplifying sales scale could allow Dafa to strategically step into less-competitive regions to have more margin upside.
- The key to lower the funding rate: We think the Company’s 9.5% funding rate has room to improve via 1) repayment of trust loans (13% rate), as Dafa lowered its % of total debts to 20% by end-20 from 27% in 1H20. 2) Cash collection rate: Company has set the KPI of 90% in 2021E vs 75-80% in 2019-20. 3) Improvement in cash composition as the restricted and pledged cash remained high. 4) Clear inventory of RMB2.8bn (10% of current asset).
- Expect 12% core earnings CAGR in 2019-2022E on revenue growth. Riding on strong sales in 2019/20, we forecast total revenue to grow at 15% CAGR in 2019-2022E to reach RMB11bn. GPM would stay stable at 21-22% due to fast asset turn. Core earnings are expected to grow at 12% CAGR in 2019-22E as increasing MI would offset the operating leverage. Initiate with Buy with TP of HK$8.32. We derive TP by applying 45% discount to its NAV per share at HK$15.1. Risk: policy tightening.
