As born and deep rooted in YRD region (78% of land bank), Shinsun has achieved over RMB90bn sales club in 2020. With its strong YRD focus and national expansion, we think its 2021E sales growth will outperform industry to reach RMB105bn (+15% YoY). Also, its balance sheet may improve faster than expected with gearing below 100% by 2020E on equity funding and JV. We expect 22% earnings CAGR in 2019-2022E to RMB4.2bn driven both by revenue and margin improvement (ASP and funding costs). Initiate with Buy Rating.
- High concentration on YRD region to benefit from the booming development. The Company has a total land bank of 23mn sq m (attributable of 70%), out of which 78% is located in the Yangtze River Delta Region (50% from Zhejiang, 15% from Anhui and 10% from Jiangsu). In the short term, the wealth effect from stock market would spur the buying demand, evidenced by the recent sales data. In the long term, the YRD zone development would support long-term population inflow and thus housing demand/price.
- We expect sales to grow 15-20% YoY in 2021E: As a fast-growing developer (35% CAGR in 2017-2020), we may continue to see above-industry sales momentum at 15% YoY in 2021E thanks to 1) robust demand in YRD region; 2) strategical national expansion to key cities like Wuhan; and 3) increasing JV stakes: The level attributable sales % is ~70%, which is higher than the industry so it has room to increase JV stakes and reduce the burden.
- Net gearing improving faster than market expectation: Previously the fast growth and high attributable ratio put its balance sheet under pressure. With equity raising, constrained land acquisition (only at 30-40% of sales) and more JV sharing to lower the burden, its net gearing may go to below 100% in 2020E from 361% in 2019, satisfying the requirement of “three red line” policy.
- Expect 22% core earnings CAGR in 2019-2022E on margins. We forecast total revenue to grow 12% CAGR in 2019-2022E to reach RMB49.3bn. Core earnings are expected to grow 22% CAGR in 2019-2022E on improvement of gross margins to 25% (rising ASP in YRD and funding costs to 9%).
- Initiate with Buy with TP of HK$7.75. We derive TP by applying 40% discount to its NAV per share at HK$12.92, equivalent to 5.3x 21E PE. The Company is trading at 4.1x 21E PE, below industry average of 5x. Catalyst: Southbound inclusion effective on 15 Mar. Risk: sales slowdown in YRD.
