Following a positive 1H16 where Chinese developers saw net profit rising by six percent year on year, Chinese developers should continue to enjoy margin and earnings improvement on rising average selling price (ASP) and volume. CIMB believes that developers’ share prices could further benefit from increasing buying interest from mainland China investors, given their low P/E, as well as high ROE and yields.
Here are three Chinese property developers with sound fundamentals and good yields that CIMB recommends:
1. China Overseas Land & Investment Ltd (0688.HK)
While investors are raising concerns over low gross margins of CITIC’s projects, CIMB believes that the CITIC acquisition will be beneficial to China Overseas Land & Investment (COLI). This is especially so for its margins and earnings growth in the next few years. COLI management indicated that the transaction will be completed in the near future, and he expects total sales resources from CITIC projects to be around RMB 450 billion. This could account for 40-50 percent of COLI’s sales in FY17-19.
Given the expensive land prices, COLI’s management said that they will be very cautious about buying land via auctions. Instead, COLI will focus more on acquisitions similar to the CITIC deal. Given its strong financial status, CIMB is confident that COLI will continue to be on the lookout for more acquisitions to achieve its sales target of HK$ 400 billion by 2020.
COLI currently trades at an attractive valuation of a 25 percent discount to NAV and 9x FY16 P/E. On top of the attractive valuation, it is also attractive as a dividend play with its 3.3 percent yield. The high dividend payout in 1H16 is not a one-off with the company, indicating that it will increase its dividend payout gradually in future. CIMB expects COLI to increase its payout to about 30 percent this year from 20-25 percent previously.
COLI: BUY, TP HK$35.00
2. CIFI Holdings (0884.HK)
Timely Land Banking and Strong Volume Growth
CIFI’s timely land purchases in 2014/15 and rising selling prices in top tier cities in the past 12 months have led to a strong performance for CIFI moving forward. CIFI’s gross margin for 2H16 and FY17/18 will likely be more than 27 percent. Coupled with its strong volume growth, management expects CIFI’s earnings to increase 20-25 percent per annum in FY16-18.
CIFI announced on 6 Sept that it will acquire stakes in five projects (30 to 50 percent) in Suzhou, Yixing and Changsha from Henderson China for a total consideration of RMB 1 billion. Based on CIMB’s assessment, the acquisitions are attractive and may offer 25-30 percent gross margin.
Similar to COLI, CIFI is also an attractive dividend play. CIFI’s chairman reminded investors of CIFI’s dividend policy of paying 30-35 percent of its earnings as dividend. He indicated that total FY16F dividend per share could likely be HK$ 0.17-0.18, and increase to HK$ 0.22 in FY17F and HK$ 0.26 in FY18F because of CIFI’s future strong earnings growth. CIMB estimates that CIFI will offer attractive dividend yields between 7 to 10 percent over FY16- 18F.
CIFI: BUY, TP HK$3.42
3. Longfor Properties (0960.HK)
Longfor has benefited significantly from its proactive land banking in top-tier cities. It should expect to see a relatively better performance in margin terms, due to their unique land banking activities, or cheap land cost. On top of its development activities, its rental income is also set for record strong growth of 20-30 percent per annum in the next few years. Longfor offers a potential dividend yield of 4.5 percent for FY16F. Given its strong financial position, Longfor developers could even raise payouts further in the future.
Longfor: BUY, TP HK$16.40