Uphill Living in Shenzhen Company Rating:
Outperform
(initiation)
Shenzhen Investment is a good candidate for investors
seeking high potential earnings and sales growth upside
coupled with defensiveness against policy risk. Thanks to
its background as an SOE, the company has strong
bargaining power to secure financing, reflected by a lower
average cost of borrowing than peers. It can also look to its
parent, Shum Yip Group, for asset injections. Based on its
ability to maintain quick asset turnover and margin
expansion as a result of product upgrades, we expect a
62.8% CAGR for completed GFA in 2013-2015F.
Focus on Shenzhen has proven worthwhile. Apart
from its property development business, Shenzhen
Investment owns sizeable investment properties in
prime locations of Shenzhen, including a 27.4%
interest in Road King (1098 HK, Not Rated) and a
22.6% interest in Coastal Greenland (1124 HK,
Not Rated). Shenzhen Investment benefits from
extensive and close relationships with prominent
SOEs in Shenzhen. Most recently, it signed an
agreement with Shenzhen International (152 HK,
Outperform) to cooperate on the Qian Hai site.
Valuation. The stock is trading on 7.1x FY13 P/E,
0.6x FY13 P/B and a 64.8% discount to NAV,
compared with sector averages of 7.7x, 1.2x, and
36.7%. We estimate a target NAV discount of 55%
based on the one-year historical NAV discount of
c.55%. Improvement is dependent on (1) earlier-than-
expected completion of the company’s 2013F full-year
sales target, (2) the 2014F sales plan, and (3) the
realization of further asset-injection plans in 2014F.
Initiate with Outperform. Our HK$4.19 target price
offers 28.0% potential upside. The target price is
based on a 55.0% target NAV discount and a
mid-FY14F NAV of HK$9.30 per share. Action. We
advise gradually accumulating Shenzhen Investment
on weakness in 4Q13F as we anticipate stronger
stock performance in early 2014F due to an
anticipated c.70% surge in saleable GFA from 1.5m
sm in 2013F to 2.6m sm in 2014F. We expect
Shenzhen Investment to set a 33.3% higher sales
target of RMB12.0b in 2014F.
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