• Underwhelming delivery in 2018
• Cloudy outlook
• FV of HK$4.27

Missed by a Wide Berth

As a recap, Sino-Ocean Group Holding Limited’s (Sino-Ocean; 3377 HK) 2H18 results were significantly under ours and the street’s expectations. FY18 revenue fell 10% to RMB 41.4b, due to a 15% drop in property development revenue. This was largely on the back of construction delays in 1Q18. Also, some projects were disposed by way of share transfer, and thus would not have contributed to the topline. Gross profit margin dropped 4.5 ppts to 20.0%, significantly below that of its peers. The group’s core PATMI came in at RMB 2.6b, comprising 54% of our full-year forecast. The group has declared a full-year dividend of HK 21.3 cents/share, representing a payout ratio of 40%, same as that of 2017.

Delivery Schedule a Concern

Management has guided for a contracted gross sales target of RMB 140b in 2019, which is approximately a 28% increase over 2018. What is more ambitious, from our point of view, is its desire to hit the RMB 200b mark by 2020, which represents a growth of ~42% YoY. Even if such growth figures do come to pass, we believe that it would be unlikely for earnings to grow in tandem.

Since 2015, the attributable ratio of the group’s total land bank has dropped from ~75% to ~55.6% in 2018. Therefore, the flow-through from gross sales growth to the bottom-line would necessarily see notable leakage. Furthermore, we believe that the market remains concerned about the expected delivery schedule in 2019 (which affects revenue recognition), given the somewhat lackluster performance in 2018.

FV of HK$4.27

While Sino-Ocean’s share price has trailed behind its peers on a YTD basis, the counter has seen a sharp surge of ~18.9% since 29 Mar’19. We believe the reason for this could be due to management exercising their share options following the results blackout period, as well as a catch-up play with the general re-rating across the sector. We employ a target P/E multiple of 8.6x (based on 0.25 S.D. above the 10-year mean) and bring our FV estimate down from HK$5.32 to HK$4.27.

Source: OCBC Research - 5 Apr 2019