Kaisa ： Expect further re-rating in 2014 emerging as a more scaleable player

Deutsche Bank Markets Research Rating Buy Asia China Property Property Company Kaisa Date 21 February 2014 Forecast Change Expect further re-rating in 2014 emerging as a more scaleable player Reuters Bloomberg Exchange Ticker 1638.HK 1638 HK HSI 1638 ADR Ticker ISIN KAISY US48300T1025 Forecasts And Ratios Year End Dec 31 2012A 2013A2014E2015E2016ESales (HKDm) 11,955.0 19,523.124,838.630,229.736,667.1Reported NPAT(HKDm) 2,072.2 2,857.43,540.74,506.45,711.9DB EPS FD (HKD) 0.31 0.420.640.811.01PER (x) 5.2 5.34.23.32.6DPS (net) (HKD) 0.00 0.150.180.230.29Yield (net) (%) 0.0 6.66.88.711.0Source: Deutsche Bank estimates, company data Reiterate Buy on anticipated re-rating ahead; target price raised to HK$4.68 ________________________________________________________________________________________________________________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. MICA(P) 054/04/2013. Price at 20 Feb 2014 (HKD) 2.67Price target - 12mth (HKD) 4.6852-week range (HKD) 2.67 - 1.58HANG SENG INDEX 22,665 Jason Ching, CFA Research Analyst (+852) 2203 6205 jason.ching@db.com Tony Tsang Research Analyst (+852) 2203 6256 tony.tsang@db.com Key changes Price target 4.15 to 4.68↑12.8%Sales (FYE) 20,271 to 24,839↑22.5%Op prof margin(FYE) 27.3 to 26.7↓-2.3%Net profit(FYE) 3,450.8 to 3,540.7↑2.6%Source: Deutsche Bank Price/price relative 1.21.62.02.42.83.22/128/122/138/13KaisaHANG SENG INDEX (Rebased) Performance (%) 1m3m12mAbsolute 18.110.814.1HANG SENG INDEX -1.2-4.4-2.8Source: Deutsche Bank We reiterate our positive stance on Kaisa following a strong set of FY13 results and raise our target price to HK$4.68 (HK$4.15). On top of the strong results, more importantly, we believe Kaisa has reached a new milestone via delivery of a solid 5-year track record as a listed company, where core net profit CAGR reached 42%. With FY14 contracted sales expected to exceed the Rmb30bn threshold and core net profit to exceed Rmb3.5bn, we believe Kaisa deserves further scope of re-rating in 2014 as it merges as a more scaleable player in the industry, leading to a narrowing of NAV discount and higher PE multiple. FY13 core net profit +63% to Rmb2,786mn, gross margin expanded to 34% Kaisa reported FY13 revenue +63% YoY to Rmb19,521mn, 16% ahead of our projection, boosted by a 56% surge in GFA delivery to 2.56mn sqm. Meanwhile, delivery ASP was +6% YoY to Rmb7,450/sqm. Excluding revaluation gain and non-recurring income, core profit was +65% YoY to Rmb2,786mn, in line with our estimate but some 15% higher than consensus. Meanwhile, gross margin saw a 1.3ppt expansion to 34% but slightly below our projection of 35%. The company announced its first final dividend of HK$0.15/shr in 2013 (equivalent to 6% dividend yield on the current share price), an upside surprise added to the already strong set of FY13 results. Net gearing improved to 62%; average funding cost saw a marked decline As of end-13, Kaisa has cash balance of Rmb8,706mn (unrestricted cash of Rmb7,303mn and restricted cash of Rmb1,676mn), a marked increase from Rmb5,352mn a year ago. Gross debt was +44% YoY to Rmb22,225mn but up only 13% from mid-13. Net gearing improved to 62% by end-13 from 67% as of end-12 but represented a much bigger improvement from 82% by mid-13. Kaisa completed three refinancing bond issues in 2013 with a total amount exceeding Rmb8.2bn. As these issues were at much lower coupons than previous issues, average funding cost declined markedly to 8.1% (from 10.2%). Target price at a 40% discount to our revised NAV estimate of HK$7.8/share Our target price is based on a 40% discount to our NAV estimate of HK$7.8/shr (HK$6.92/shr), which implies a 2014/15e PER of 6x/5x. Our target discount is markedly higher than industry leaders, which we believe is appropriate given its short listing history and smaller business scale. We adopt NAV as primary valuation metric, in line with residential-focus peers under our coverage. Key risks: government tightening policies and e