• Good 1H17 scorecard
• Lowering net gearing
• FV of HK$28.64

Initiate With HOLD Rating and HK$28.64 FV Estimate

We initiate coverage on China Evergrande (3333 HK) with a HOLD rating and a fair value estimate of HK$28.64. This is derived by applying a 8.2x PE multiple to our blended FY17/18 EPS estimate, in line with its peers which are currently trading at a 12m blended forward PE of 8.2x. For additional perspective, we note that the first two rounds of strategic investors in Hengda Real Estate Group Company Ltd. came in at an implied FY17E/18E PE of ~7.2x. After accounting for our blended FY17/18 dividend forecast of HK$0.44, this translates to a 12m forecasted total return of -5.4% against the last closing price of HK$30.75.

Seeking to Strengthen Its Balance Sheet

Evergrande’s net gearing stood at 432% as at end-FY16. However, as a result of bringing in strategic investors, management reduced its net gearing to 240% as at 30 Jun 2017. Evergrande has highlighted plans to pare its net debt ratio to ~70% by 2020. This would be underpinned by its planned reduction of land reserves by approximately 5%-10% annually, growth of its earnings and plans to introduce a third round of strategic investments of RMB 30-50b by Hengda Real Estate Group Company Ltd. The group completed the redemption of its PCS amounting to RMB 113b as at end June 2016.

Given that the securities incurred high cost-of-funding rates at 11.3%, the company’s deleveraging plan will have a positive impact on earnings ahead and also significantly lower the risk profile of its balance sheet and earnings.

Expected Gain in Growth Momentum for Contracted Sales

During 1H17, Evergrande launched 74 new projects in 59 cities and recorded accumulated contracted sales of RMB 244.1b and ASP of RMB 9,862 psm. Management attributed the robust performance to its large scale of operations, ability to value-add to the features of its products and flexible sales strategy and marketing model.

Looking ahead, Evergrande intends to capitalize on market timing and selectively launch new projects based on its expectations of overall market needs.

Source: OCBC Research - 6 Oct 2017