• Allaying some refinancing concerns
• Jan contracted sales grew 6% YoY
• Challenges remain

Completed Some Refinancing Requirements Recently

During our initiation report on Guangzhou R&F (R&F) (Stock code: 2777 HK) on 7 Dec 2018, we had highlighted our concerns on potential refinancing risks, coupled by the fact that it has a number of bonds that can be puttable for early redemption in FY19. Since then, R&F has managed to refinance some of its debt, albeit at relatively high financing costs, in our view.

For example, it issued a 7% onshore bond amounting to RMB7.02b and two offshore USD denominated senior notes (US$500m 8.75% due 2021 and US$300m 9.125% due 2022) in Jan this year.

Slow Start to Jan Contracted Sales

R&F managed to turn around its contracted sales growth for the last two months of 2018 (Nov: +145% YoY; Dec: +107%) following a subdued month in Oct. This culminated in full-year attributable contracted sales of RMB131.06b in 2018, representing growth of 60%. This was slightly above management’s guidance of RMB130b but beat our expectations as we had forecasted growth of 52.5% to RMB124.8b.

Moving into 2019, we note that R&F only managed to drive a 6% YoY increase in its Jan contracted sales to RMB6.89b (Jan 2017 had shown YoY growth of 75%). We believe this still reflects competitive challenges in the industry. We factor in R&F’s actual 2018 pre-sales data in our model, but retain our 2019 forecast of RMB159.8b.

Strong Rebound in Share Price; Sell Into Strength

R&F’s share price has rebounded 34.5% YTD after correcting 32.8% for the whole of 2018. This recovery makes it the best performing Chinese developer based on the peers set which we track. We bump up our fair value estimate from HK$9.63 to HK$11.94 after raising our FY18 and FY19 core EPS forecasts by 3.4% and 4.0%, respectively, and also increasing our target P/E peg from 2.6x to 3.1x (representing -1.5 s.d. from 8-year mean) FY19 core EPS to take into account R&F’s lower financial risk and re-rating in the industry. H

owever, given R&F’s strong share price recovery YTD and its last closing price of HK$15.92 on 11 Feb, we opine that valuations remain unattractive, and continue to recommend investors to sell into strength. Key risks such as potential dilution from a large equity fund raising exercise to bring down its gearing ratio remain, in our opinion.

Source: OCBC Research - 12 Feb 2019