AMTD Research | Powerlong Real Estate (1238.HK)
AMTD Research has published the report of Powerlong (1238.HK). We expect Powerlong to extend its growth trajectory into 2020, driven by launches of new projects acquired in 2H19 and home purchase demand stimulated by local government’s policy easing. Following the stock’s recent pull back, valuations are back at attractive levels of 4.3x 2020E P/E, 2020E div yield of 11.6%, reiterate Buy.
Earnings growth outlook intact despite COVID-19 outbreak, reiterate Buy
Powerlong has set a 25% contracted sales YoY growth target to RMB75bn for 2020, with an above industry average GP Margins of ~31-35%. This growth target is higher than our expected ~20% contracted sales growth. YTD March run-rate is at ~11%, reflecting management’s confidence in the industry’s outlook in the coming months, driven by project launches in 2Q20 and 3Q20. The developer has spent RMB21.5bn on land acquisitions across 41 projects during 2019. We believe that these new acquisitions are key contributors to the developer’s RMB130bn 2020 sellable resources, driving the 25% contracted sales target growth based on a ~58% sell-through rate.
2019 results beat expectations by 7% amid better than expected GPM
Powerlong’s 2019 core attrib. net profit came in at RMB2,680m, up 44.3% YoY, beating AMTD estimates by 7% amid better than expected GP Margins. 2019 Revenues grew 33% YoY to RMB26,042m, while 2019 GP Margins came in at 36% (vs 2019E: 34%). 2019 Net Debt to Equity was at 81% (1H19: 89%) aided by the fund raised through the share placement in Oct 2019. Company announced a Special Div of HK$0.04/sh in additional to the HK$0.27/sh Final Div, bringing the full year DPS to HK$0.40/sh, implying a 2019 div yield of 8.8%.
Most of sales office and construction sites reopened
Despite the impact of the COVID-19, Powerlong’s contracted sales YTD March came in at RMB8.0bn and is only down 25% YoY (mitigated by a strong Jan 2020 and CNY base effect from 2019). As the developer does not have any exposure in Hubei Province, most of the company’s sales office and construction sites have now reopened.
Accommodative environment to recycle capital invested into Inv Prop
We believe Powerlong’ s rental income will be under pressure in 1H20 amid the virus outbreak. However, as we have pointed out in our initiation report on 8 Oct 2019, we believe Powerlong’s commercial properties offer them an edge in acquiring prime located low-cost land bank underpinning its contracted sales and profit margins. We argue that Powerlong’s key to long term success lies with its ability to recycle the capital invested into shopping malls back into development properties, instead of focusing on the rental income stream itself. With 5-yr LPR having declined to 4.65% in April 20 (Oct 19: 4.85%), and monetary easing polices expected to remain, creating a favourable environment for Powerlong to recycle its invested capital via onshore financing, in our view.
Attractive valuations at 4.3x 2020E P/E and 0.5x 2019 P/B
We believe that Powerlong is currently trading at attractive valuations of 4.3x 2020E P/E and a 0.5x P/B. Our new TP of HK$6.50/sh is based on a target 2020E PE of 6.0x, offering 40% upside to its current share price.
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