• Unique exposure to Beijing-TianjinHebei
• Margin erosion minimal
• Earnings to grow at a healthy clip

Exposure to the Beijing-Tianjin-Hebei Integration Area

Sino-Ocean Group Holding Limited (Sino-Ocean; 3377 HK) is a real estate holding company with property development as its primary line of business. Whilst well-diversified across a number of key regions, it maintains an overall tilt towards the Beijing-Tianjin-Hebei integration area.

We are positive on this region, given the central government’s clear economic plan for each of the three provinces, as well the synergistic growth expected in time to come. Increasing urbanization and the relaxation of the ‘one-child policy’ would also facilitate population relocation towards tier-1/2 cities in key development zones, thereby generating healthy medium-long term end-user demand for real estate.

Sustainable Near-term Margins

By actively pursuing land acquisitions through M&A, as opposed to heavy reliance on tenders, management has been able to acquire land at reasonable rates, thereby keeping gross margins on an upward path from 20.6% in 2015 to 24.5% in 2017. We believe this cost discipline will continue to be observed moving forward.

Furthermore, from what we understand, the group’s pre-sales gross profit margin in 2017 sits in the range of 27-28%, thereby giving us confidence that our assumed gross profit margin of 25.0% for the next two years is relatively conservative, with the possibility of realized margins surprising on the upside.

Quicker Asset Churn Rate

The group is targeting to grow contracted sales by 50% CAGR over the next 3-4 years. Management has set a 2018 contracted sales target of RMB 100b, representing a 41.7% YoY growth. We believe this is achievable, given the modest implied sell-through rate of ~57.1%, demonstrated results from a change in middle management, as well as incentive schemes.

Smaller projects have also been acquired in order to minimize the time needed to launch projects. The group has also actively implemented product standardization in 2017, which is an attempt again to achieve a quick turnover across cities.

Based on our estimates, the above should allow the group to attain a core PATMI growth of 20.9% – 33.8% in FY18 and FY19, respectively. All considered, we employ a 8.2x FY18F P/E peg, in-line with its 10-year mean, thereby giving us a FV estimate of HK$6.34.

Source: OCBC Research - 30 May 2018