Glorious Property (845 HK)-Growth beyond Shanghai

China/Hong Kong China Property Please read the analyst certification and other important disclosures on last page Glorious Property (845 HK) 8 March 2010 Growth beyond Shanghai Company Rating: Sector Rating: Outperform (initiation) Overweight (maintained)
Deep value emerging. Glorious Property (Glorious, 845 HK) has seen volatile trading since its listing in 3Q09, and the excessive slump after IPO was blamed to the prevailing concern that luxurious property market in Shanghai will become target of mortgage tightening. We believe that such concern is only short-lived and will not overshadow the company’s long-term growth prospects. We see deep values emerging at the current price levels with a 57.9% discount to non-MOU NAV (NAV estimation for projects with land title obtained), which is well buffered to absorb any short-term correction in land and property prices in Shanghai.
Where is the margin of safety? Glorious is leveraged to China’s high-end property market, and its share price is more sensitive than its peers on the changing economic environment, policy shift and reversal of liquidity flow. While sharing investors’ wariness on the company, we see high margin of safety for an entry point to the stock at current level with a 6.0% discount to the company’s replacement value at HK$3.48 per share (see details on page 8).
Long-term driver being overlooked: it is more than Shanghai. While maintaining its leadership in the high-end market in Shanghai, Glorious has already successfully expanded into other high-growth cities in Yangtze River Delta (YRD) and northern China. Key edges to support growth beyond are established branding, product quality and flexible land banking strategy.
Further re-rating potential. We initiate coverage on Glorious with an Outperform rating as we see deep values, healthy financials and attractive growth prospects for the company. We set our target price at HK$5.05/share, which is based on a 35.0% discount to forward NAV of HK$7.77/share. Our NAV estimate could be potentially enhanced to HK$8.30/share upon successful acquisition of land titles to MOU-based projects. Key risks to the company include: 1) risk of hard-landing due to stronger-than-expected tightening, but the risk is manageable at current stage; 2) volatility in transaction prices and volume; 3) execution risk. However, the company’ sales execution and proven track record shall help mitigate market risk and execution risk. Forecast and valuation Year to 31 Dec 2008 2009F 2010F 2011F Turnover (RMB m) 3,949 5,961 10,053 15,155 Net profit (RMB m) 1,255 2,053 3,008 4,047 EPS (RMB) – 0.26 0.39 0.52 YoY change (%) – – 46.5 34.5 PE (x) – 10.9* 7.4 5.5 BPS (RMB) – 1.35 1.79 2.35 PBV (x) – 2.1 1.6 1.2 ROE (%) 136.6 19.5 21.6 22.1 * On a pro forma basis, and 09F PE is 2.9x if calculated on weighted No. of shares. Source: Company data, CCBIS estimates Price: HK$3.27 Target: HK$5.05 (Initiation) Trading data 52-week range HK$ 2.61– 4.40 Market capitalization (m) HK$25,482/US$3,283 Shares outstanding (m) 7,791 Free float (%) 35.1 YTD average daily T/O (m share) 17.6 Closing price on 5 March, 2010 Stock price and HSCEI 0.00.51.01.52.02.53.03.54.04.55.01-Oct-091-Nov-092-Dec-092-Jan-102-Feb-105-Mar-1002,0004,0006,0008,00010,00012,00014,00016,000HK$Glorious PropertyHSCEI Source: 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 Glorious Property (845 HK) 8 March 2010 2 Table of Contents Growth beyond Shanghai ............................................................................................................................................. 1 Summary....................................................................................................................................................................... 3 Financials ...................................................................................................................................................................... 6 Investment focuses ....................................................................................................................................................... 7 Valuation analysis ....................................................................................................................................................... 15 Financial projection ..................................................................................................................................................... 19 Company snapshot ..................................................................................................................................................... 22 Glorious Property (845 HK) 8 March 2010 3 Summary Oversold on tightening concer