Powerlong Commercial announced less-than-expected FY20 mall delivery and soft top-line growth, but core profit beat consensus due to all-round margin improvements. We think the Company’s guidance of 40% NP CAGR is achievable given that 1) Powerlong’s parentco is still set to deliver avg. 10+ malls per year given 100 mall contracts secured vs. 60 in operation, and parentco’s 35% YoY growth in FY20 contract sales, and 2) has shown evidence it can reach ~95% occupancy in LT with FY20 occupancy up 2ppt from 1H20. We revise up earnings estimates in 2021E/22E to RMB459mn/592mn to reflect confidence under improved margin assumptions. Lift TP to HK$33.2 and reiterate Top Pick.
- Commercial revenue softer than expected but overall margin enhanced. FY20 Revenue was up 18.6% YoY to RMB1.92bn, lower than consensus/CMBI estimates, mainly due to less-than-expected mall delivery (17 vs. guidance of 20+). Core profit (excl. share incentives) was up 81% YoY to RMB 324mn, beating consensus and in line with our estimates, due to 1) +3.5ppt in commercial GPM due to higher contribution of pre-opening services; and 2) correction of low residential margins (2020: 23% vs. 2019: 13%) through introduction of VAS. Occupancy rate returned to pre-pandemic levels at 90%.
- 40% net profit CAGR achievable through improved mall delivery and occupancy. The Company gave guidance of 22 new commercial projects in 2021 with 14 from parentco, 2 third-party and 6 Xinghui projects, which is a reasonable goal given 40 malls in reserve and potential for extra third-party gains. The Company also plans to improve occupancy rate to 93% in 2021 (95% in LT) through revising tenant portfolio for older, weak-performing malls, and keep delivering new projects with higher occupancy (new projects in 2020: 91.6%). Overall Powerlong aims for 40% NP CAGR which we think is achievable if the previous conditions are met.
- Brand upgrade to facilitate third-party expansion. Going forward, Powerlong’s strategy is still one of fast expansion centered around its mid-tier offering Powerlong Plaza, but has a five-year plan to build 1-2 high-end, flagship malls in each of 6 major cities in YRD to improve the Powerlong brand, and facilitate third-party expansion. The Company’s expansion team has tripled in size since the new CEO’s arrival in June, and focuses on YRD regions and GBA.
- Reiterate Top Pick; revise TP to HK$33.2. We revise up earnings estimates in 2021E/22E to RMB459mn/592mn to reflect confidence under improved margin assumptions. Catalysts: 1) Update on key commercial PM metrics; 2) Potential M&A. Update TP to HK$33.2, reflecting 30x 2022E P/E; Reiterate Top Pick.
