Kasen International (496 HK) - Flying phoenix： a direct beneficiary of buoyant Hainan market

China/Hong KongChina Property Please read the analyst certification and other important disclosures on last page Kasen International (496 HK) 2 February 2010 Flying phoenix: a direct beneficiary of buoyant Hainan market Company Rating: Sector Rating: Not Rated Overweight  Where is the value? Kasen International (“Kasen”, 496 HK) is currently trading at 1.5x 09F PBV, with major real estate assets including 1.4m sqm land bank in Hainan at blended cost of RMB508/sqm. Such land bank offers good value to investors on buoyant prospects of Hainan property market. We estimated the company’s base-case NAV at HK$6.09 per share, and see sustainable development of Hainan property market andcontinued asset restructuring as the key rerating catalysts to the company.  Direct beneficiary of buoyant Hainan market. Despite recent negative sentiment across nation-wide property markets, housebuyers in Hainan remain upbeat and property sales continuesto see good momentum. We just came back from a field trip study in Hainan with more comfort in the outlook of Hainanproperty market. With 56.9% of its land bank located in costal line of Hainan, Kasen is a direct beneficiary of the prosperousmarket in the island with rising land and property value.  Earnings turnaround in 2009F. We expect Kasen to turnprofitable in 2009F, helped by disposal gain, and profit to grow 188.1% yoy in 2010F on improved outlook for leather market and growing contribution from real estate sector as it will start to deliver its development project in Hainan. We expect the company’s net gearing ratio to stay at 41% as of end-2009，upfrom 30.5% as of 1H09, and it may need to pay additional land premium for its Sanya land site. The amount and paymentschedule of such land premium are still uncertain and may affect its overall cash flow position in 2H10.  Key risk factors to the company include: 1) execution risk related to real estate development business, as it has a short track record in the sector; 2) uncertainties related to one of its land bank in Sanya, which it has not yet obtained relevant approval for residential development; 3) market risk; 4) risk of stronger-than-expected tightening; 5) potential sell-off pressure from substantial shareholder of Kasen, Warburg Pincus, which still holds 11.71% stake in the company. Forecast and valuation Year to 31 Dec 2008 2009F 2010F 2011F Turnover (RMB m) 1,894 2,217 3,369 4,022 Net profit (RMB m) (274) 97 280 511 EPS (RMB) (0.26) 0.08 0.24 0.44 YoY change (%) 30.0 (132.1) 188.1 82.8 PE (x) (9.4) 29.3 10.2 5.6 BPS (RMB) 1.73 1.68 1.95 2.46 PBV (x) 1.4 1.5 1.3 1.0 ROE (%) (14.8) 5.0 12.3 17.9 Source: Company data, CCBIS estimates Price: HK$2.79 Target: Nil Trading data 52-week range HK$0.455-2.85 Market capitalization (m) HK$3,239/US$417 Shares outstanding (m) 1,161 Free float (%) 53.5 Year-to-date average daily T/O (m share) 1.5 Closing price on 1 February, 2010 Stock price and HSCEI 02,0004,0006,0008,00010,00012,00014,00016,000Jan-00Feb-00Mar-00Apr-00May-00Jun-00Jul-00Aug-00Sep-00Oct-00Nov-00Dec-00Jan-010.00.51.01.52.02.53.0HK$HSCEIKasenSource: Bloomberg Wang Ren (852) 2532 6749 wangren@ccbintl.com Sarah Wang (8610) 6606 9688 630 wangxiao@ccbintl.com Edmond Chan (852) 2532 6123 edmondc@ccbintl.com Kasen International (496 HK) 2 February 2010 2 Table of Contents Flying phoenix: a direct beneficiary of buoyant Hainan market ....................................................................................1 Investment theme .........................................................................................................................................................3 Financial summary........................................................................................................................................................5 Valuation discussion .....................................................................................................................................................7 Business overview ......................................................................................................................................................10 Financial outlook .........................................................................................................................................................14 Risk considerations.....................................................................................................................................................16 Company snapshot .....................................................................................................................................................18 Kasen International (496 HK) 2 February 2010 3 Investment theme Direct beneficiary of buoyant property market in Hainan State government has approved the