Deutsche Bank-KWG Property（1813.HK）Achieving a good balance between turnover and profitability

Deutsche Bank
Markets Research

Rating
Buy
Asia
China
Property
Property

Company
KWG Property

Date
1 September 2014

Company Update

Achieving a good balance between
turnover and profitability

Reuters Bloomberg Exchange Ticker
1813.HK 1813 HK HSI 1813



Forecasts And Ratios
Year End Dec 31
2012A 2013A 2014E 2015E 2016E
Sales (CNYm)
9,676.4 9,468.0 13,320.4 13,575.8 15,217.9
EBITDA(CNYm)
3,200.4 3,372.7 4,166.0 4,266.9 4,809.9
Reported NPAT(CNYm)
2,294.9 2,749.8 3,247.2 3,910.6 4,177.2
DB EPS FD (CNY)
0.79 0.80 1.12 1.35 1.44
PER (x)
4.6 4.9 3.8 3.1 2.9
Yield (net) (%)
4.1 7.4 5.9 6.1 6.4
Source: Deutsche Bank estimates, company data


Maintaining Buy, TP of HK$6.68; we see stable and solid growth ahead

________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014.

Price at 1 Sep 2014 (HKD) 5.36
Price target - 12mth (HKD) 6.68
52-week range (HKD) 6.05 - 3.57
HANG SENG INDEX 24,742


Tony Tsang
Research Analyst
(+852) 2203 6256
tony.tsang@http://wendang.chazidian.com


Jason Ching, CFA
Research Analyst
(+852) 2203 6205
jason.ching@http://wendang.chazidian.com


Key changes
Sales (FYE) 12,258 to 13,320 ↑ 8.7%
Net profit(FYE) 3,147.7 to
3,247.2
↑ 3.2%
Source: Deutsche Bank

Price/price relative
3.0
4.0
5.0
6.0
7.0
9/12 3/13 9/13 3/14
KWG Property
HANG SENG INDEX (Rebased)

Performance (%) 1m 3m 12m
Absolute -7.9 9.4 2.3
HANG SENG INDEX 0.9 7.2 13.9
Source: Deutsche Bank


Recently, the share price of KWG has been affected by concerns on equity
raising in the sector. However, with its comfortable net gearing level and falling
cost of borrowing, we see no imminent need of new equity financing for KWG.
More importantly, we see KWG as being able to strike a good balance between
asset turnover and profitability, instead of solely emphasizing asset turnover
(which could damage margins). With this balance, KWG has consistently
achieved stable and solid earnings growth at higher-than-industry margins.
Valuations are attractive at the current 52% NAV discount and 4x 14E PE.
KWG targets 15% net margin when determining pricing & acquisition strategy
Management has reiterated that KWG will maintain a balance between sales
scale and profitability. Through careful sales strategy, pricing and new land
acquisitions, KWG has consistently delivered solid earnings growth with stable
yet higher-than-average core net profit margin of 17-22% in the past five years.
For rest of 2H14, given the latest gearing situation of other developers, we
expect another round of major inventory clearance in Sep-Nov with more price
cuts, which should stimulate sales and present positive news flow for the
sector. Developers with stronger financial positions and higher margins to
begin with, like KWG, should see relatively less margin pressure thanks to
stronger holding power and bigger buffers from LAT savings even after price
cuts.
Solid financial positions with falling borrowing costs provide holding power
At end-1H14, KWG’s net gearing (net debt/shareholders’ equity) was 70.5% -
lower than the industry average. Despite this, management aims to lower both
the amount of total debt and net gearing by end-2014. And as management
continues to deploy a prudent financial management strategy to cut its overall
borrowing costs, we see more interest cost savings. For example, in July 2014,
KWG has successfully issued US$400mn 5-year senior notes at 8.25% p.a. –
the lowest in KWG’s history. In 1H14, KWG’s average cost of bank borrowings
was 7.1%, while the overall average cost of borrowings was lowered to 8.3%.
Our target price is based on 40% discount to our NAV estimate of HK$11.14
KWG now also trades at 4x 2014E P/E and 3x 15E P/E. Our estimates for KWG
factor in an ASP drop of 10- 20% in 2014. Despite this, we see attractive
valuations. We expect another round of major inventory clearance in Sep-Nov
with more price cuts, which should stimulate sales and present positive news
flow for the sector. Risks: unexpected economic and policy volatility.