Friday, July 8, 2016

Company Report China Merchants Securities (HK) Co., Ltd.

Hong Kong Equity Research

Please see penultimate page for additional important disclosures. China Merchants Securities (CMS) is a foreign broker-dealer unregistered in the

USA. CMS research is prepared by research analysts who are not registered in the USA. CMS research is distributed in the USA pursuant to Rule

15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer. 1

CIFI Holdings (884 HK) Expanding market share with steady earnings growth

■ CIFI was able to maintain sales momentum despite the mild

slowdown in overall major-city home sales in recent two months. Its 1H16 contracted sales beat against its peers (+1.6x YoY vs c.45%)

■ In FY16/17E, we expect CIFI to deliver 18%/22% profit growth,

backed by better margins and volume growth. Valuation is attractive at 58% discount to NAV (peers: 54%) and FY16E 8.2% yield (peers: 4.7%); reiterate BUY and raised TP to HK$2.3

Proven solid sales under cooling measures Despite Shanghai implemented tightening mortgages and the major-city home sales generally slowed down, CIFI achieved RMB27.6bn contracted sales in 1H16, up 1.6x YoY (Our estimate: attributable +1.2x YoY) or equivalent to 76% of our annual sales estimate. Backed by about RMB35-42bn saleable resources for sale in 2H16E, we revised up our FY16E contracted sales estimate to RMB42.9bn (previous: RMB36.3bn), implying 42% YoY growth vs peers’ 9% YoY growth. We expect a lower 2H16E contracted sales at RMB15.3bn vs RMB27.6bn in 1H16 as CIFI targets higher ASP (blended ASP had been up 15% YTD) and slower sales progress in 2H16E.

Disciplined land purchases to keep 60% net gearing CIFI made RMB5.9bn total land purchases (attributable: RMB3.4bn) in 1H16, -67% YoY (attributable: -52% YoY). CIFI is less active in open land auction amid soaring land costs and it is looking for M&A opportunities. We estimate CIFI will maintain the net gearing at about 60% at Jun-end and further improve to 55% at FY16E y.e.

Outperforming YTD, but valuation still attractive We estimate FY16/17E 18%/22% YoY growth in core profits after fine-tuning FY16/17E earnings forecast by 0%/+2%. The key profit drivers in 2016E will be GPM improvement and sales volume growth, as evidenced by recent robust contracted sales. Our forecasts are broadly in line with Bloomberg consensus. Despite CIFI has been outperforming MSCI China Real Estate Index by 24% YTD, the valuation is still attractive. We reiterate BUY and raised TP to HK$2.3, equivalent to 50% discount to 1-year forward NAV at HK$4.6/share (previous HK$4.5/share), or 1.5SD above historical mean.

Financials

RMB mn 2014 2015 2016E 2017E 2018E

Revenue 16,179 18,231 17,396 17,365 19,077

Revenue growth (%) 36% 13% -5% 0% 10%

Core net profit 1,939 2,210 2,611 3,193 3,309

Core profit growth (%) 28% 14% 18% 22% 4%

Core EPS (HK$) 0.40 0.41 0.44 0.54 0.56

Net gearing (%) 66.6% 59.2% 55.2% 52.8% 53.2%

P/E (core EPS) 4.7x 4.6x 4.3x 3.5x 3.4x

P/B 0.9x 0.9x 0.8x 0.7x 0.6x

Dividend yield (%) 5.8% 7.4% 8.2% 10.0% 10.4%

Sources: Company data, CMS (HK) estimates

John SO, CPA Hayden Zhang

852-3189 6357

johnso@cmschina.com.hk

852-3189 6354

haydenzhang@cmschina.com.hk

WHAT’S NEW

Revised up TP; earnings fine-tuned

BUY

Previous

BUY

Price HK$1.89

12-month Target Price (Potential upside)

HK$2.3 (+22%)

Previous HK$2.0

Price Performance

Source: Capital IQ

% 1m 6m 12m

884 HK 0.5 22.3 17.8 MSCI China/Real Estate

(0.8) (5.8) (6.3)

Property

Hang Seng Index 20,707

HSCEI 8,601

Key Data

52-week range (HK$) 1.32-2.03

Market cap (HK$ mn) 12,676

Avg. daily volume (mn) 7.58

BVPS (HK$) at FY16E y.e. 2.5

Shareholdings Structure

Lin’s Family 54.0%

Free float 46.0%

Related Research

CIFI (884 HK) – April sales growth remained strong, May 11 2016

CIFI (884 HK) –Beneficiary of major-city sales rally in 2016E, Mar 10, 2016

China Property – Property Quantitative Easing – the key driver in 2016, Jan 29, 2016

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CIFI 884 MSCI China/real Estate

Friday, July 8, 2016

To access our research reports on the Bloomberg terminal, type CMHK <GO> 2

Focus charts Figure 1: Discount to NAV Band Figure 2: Contracted sales

Sources: Bloomberg, CMS (HK) Sources: Company data, CMS (HK)

Figure 3: Revenue and profit growth Figure 4: Net gearing

Sources: Company data, CMS (HK) Sources: Company data, CMS (HK)

Figure 5: Interest coverage Figure 6: Attributable landbank (GFA) at 2015 yr end

Sources: Company data, CMS (HK)

Note: Operating profit/total interest (including capitalized portion)

Sources: Company data, CMS (HK)

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--2SD = 75% discount

+2SD = 46% discount

Mean = 60% discount

-1SD = 67% discount

+1SD = 53% discount

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FY14 FY15 FY16E FY17E FY18E

YoY chgRMB mn

Total YoY change

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2014 2015 2016E 2017E 2018E

Revenue Core net profit40.0%

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2014 2015 2016E 2017E 2018E

Net gearing (%)

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2014 2015 2016E 2017E 2018E

(x)

Tier-1 city, 18%

Tier-2 city, 67%

Tier-3 city, 15%

Friday, July 8, 2016

To access our research reports on the Bloomberg terminal, type CMHK <GO> 3

Figure 7: Earnings revisions FY16E FY17E FY18E

(RMB mn) Original New chg (%) Original New chg (%) Original New chg (%)

Revenue 16,776 17,396 4% 17,033 17,365 2% 19,888 19,077 -4%

Cost of goods sold (12,206) (12,617) 3% (12,233) (12,451) 2% (14,880) (14,404) -3%

Gross Profit 4,570 4,779 5% 4,800 4,913 2% 5,008 4,673 -7%

General & admin expense (436) (570) 31% (610) (676) 11% (683) (757) 11%

Selling expense (690) (729) 6% (732) (766) 5% (865) (804) -7%

Interest expense (298) (298) 0% (319) (319) 0% (340) (340) 0%

Interest income 80 110 38% 80 110 38% 80 110 38%

JV & Associate items 1,148 1,148 0% 1,533 1,593 4% 1,539 1,732 13%

Others 0 0 n.a. 0 0 n.a. 0 0 n.a.

Pre-tax profit 4,375 4,440 1% 4,753 4,857 2% 4,739 4,614 -3%

Income tax & LAT (1,433) (1,494) 4% (1,479) (1,512) 2% (1,370) (1,231) -10%

Minority Interests (335) (335) 0% (151) (151) 0% (74) (74) 0%

Reported net profit 2,608 2,611 0% 3,122 3,193 2% 3,295 3,309 0%

Core net profit 2,608 2,611 0% 3,122 3,193 2% 3,295 3,309 0%

Gross profit margin (%) 27.2% 27.5% 0.2 ppts 28.2% 28.3% 0.1 ppts 25.2% 24.5% -0.7 ppts

Reported net profit margin (%) 15.5% 15.0% -0.5 ppts 18.3% 18.4% 0.1 ppts 16.6% 17.3% 0.8 ppts

Core net profit margin (%) 15.5% 15.0% -0.5 ppts 18.3% 18.4% 0.1 ppts 16.6% 17.3% 0.8 ppts

Sources: Company, CMS (HK)

Figure 8: Key financials

(RMB mn) FY14 FY15 FY16E FY17E FY18E

Total GFA delivered (k sqm) (1) 1,417 1,324 1,384 1,209 1,347

Average selling price booked (RMB psm) (2) 11,048 12,873 11,611 13,161 12,981

Property sales revenue (1) x (2) 15,654 17,047 16,069 15,912 17,486

Others 525 1,184 1,327 1,453 1,591

Total revenue 16,179 18,231 17,396 17,365 19,077

Gross profit 4,186 4,387 4,779 4,913 4,673

Profits from JCEs /Asso. (119) 173 1,148 1,593 1,732

Reported net profit 1,861 2,095 2,611 3,193 3,309

Core net profit 1,939 2,210 2,611 3,193 3,309

Total contracted sales 21,210 30,209 42,900 45,045 47,297

Property development cost (RMB psm) 8,136 9,806 8,249 9,206 9,615

Core profit per GFA delivered (RMB psm) 1,452 1,539 1,057 1,323 1,171

YoY changes (%)

GFA delivered 14.4% -6.6% 4.5% -12.6% 11.4%

Average selling price 18.2% 16.5% -9.8% 13.4% -1.4%

Total revenue 35.9% 12.7% -4.6% -0.2% 9.9%

Gross profit 36.4% 4.8% 8.9% 2.8% -4.9%

Reported net profit -1.7% 12.6% 24.6% 22.3% 3.6%

Core net profit 27.6% 14.0% 18.2% 22.3% 3.6%

Contracted sales 38.4% 42.4% 42.0% 5.0% 5.0%

Margin ratios (%)

Gross margin 25.9% 24.1% 27.5% 28.3% 24.5%

Reported net profit margin 11.5% 11.5% 15.0% 18.4% 17.3%

Core net profit margin 12.0% 12.1% 15.0% 18.4% 17.3%

Sources: Company, CMS (HK)

Friday, July 8, 2016

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Sector valuation

Figure 9: Peers comparison - valuation (based on closing prices as of 7 Jul 2016)

Company Ticker Price

(HK$)

Mkt Cap (US$ mn)

3-mth avg t/o

(US$ mn)

NAV (HK$)

Discount to NAV

(%)

FY15 P/E (x)

FY16E P/E (x)

FY15E yield (%)

FY16E yield (%)

FY15 P/B (x)

FY16E P/B (x)

Net gearing

FY15 (%)

Net gearing

FY16E (%)

Large peers average 37.8 8.4 7.0 5.1 5.1 1.1 0.9 78.7 78.5

China Overseas 688 HK 25.00 31,775 54.1 31.3 20.1 8.7 7.9 3.7 2.5 1.3 1.1 6.6 6.9

CR Land 1109 HK 18.04 16,117 27.7 30.6 41.0 8.7 7.6 3.2 2.6 1.1 1.0 24.1 26.3

Country Garden 2007 HK 3.24 9,324 5.3 5.1 36.5 6.0 5.8 4.8 5.3 0.9 0.8 87.9 108.0

Evergrande 3333 HK 4.78 8,429 16.8 8.8 45.7 9.7 7.9 9.5 8.3 1.1 0.9 314.2 310.2

*Longfor 960 HK 9.87 7,424 4.6 14.6 32.4 7.1 6.1 4.3 4.6 0.9 0.8 55.0 42.2

Shimao Property 813 HK 9.99 4,472 7.6 28.6 65.1 4.6 4.0 7.0 9.0 0.6 0.5 58.1 55.6

*Wanda 3699 HK 46.50 27,136 16.7 70.0 33.6 14.2 9.2 2.7 3.1 1.0 0.9 64.5 65.0

*China Vanke 2202 HK 15.84 30,067 25.2 22.0 28.0 8.3 7.2 5.4 5.9 1.5 1.3 19.3 14.0

Mid peers average 61.8 11.9 5.5 5.5 4.7 0.5 0.5 75.2 67.8

*Sino Ocean 3377 HK 3.23 3,128 3.2 8.0 59.6 6.8 6.3 3.9 5.4 0.5 0.5 58.5 57.9

*China Jinmao 817 HK 2.19 3,012 1.5 4.5 51.3 7.6 6.5 3.7 4.7 0.7 0.6 60.6 50.2

*Shenzhen Inv. 604 HK 3.07 2,922 3.5 6.0 48.8 7.6 7.1 5.2 5.7 0.7 0.7 45.8 12.5

*SOHO China 410 HK 3.74 2,507 2.9 8.6 56.5 39.8 29.6 22.3 4.2 0.5 0.5 25.1 32.5

*Sunac 1918 HK 4.94 2,165 5.1 12.4 60.2 n.a. 4.3 4.7 4.4 0.8 0.7 75.9 51.6

Agile Property 3383 HK 4.41 2,227 2.3 11.4 61.3 5.9 5.5 9.0 3.9 0.4 0.4 83.7 84.6

*BJ North Star 588 HK 2.34 1,929 0.3 n.a. n.a. 8.9 7.9 3.1 3.2 0.4 0.5 127.7 90.8

CIFI Holdings 884 HK 1.89 1,634 1.3 4.5 58.0 4.6 4.3 7.4 8.2 0.9 0.8 59.2 55.2

Yuexiu Property 123 HK 0.96 1,535 5.7 4.5 78.7 8.7 8.2 5.0 3.8 0.3 0.3 73.1 75.7

Greentown China 3900 HK 5.65 1,575 2.0 16.7 66.2 8.0 4.6 0.0 4.4 0.4 0.4 88.5 88.3

Yuzhou PPT 1628 HK 2.15 1,058 1.8 6.6 67.4 4.5 4.2 8.4 8.9 0.7 0.7 79.4 85.9

*Poly Property 119 HK 2.02 953 2.0 6.0 66.3 N/A N/A 0.0 0.9 0.3 0.3 114.9 97.7

*Gemdale 535 HK 0.44 886 0.2 n.a. n.a. 4.9 4.0 5.5 6.4 0.7 N/A 10.4 N/A

COGO 81 HK 2.27 668 0.3 8.0 71.6 6.0 3.9 0.0 2.6 0.5 0.4 48.0 33.2

CM Land 978 HK 1.09 689 0.3 2.4 54.6 13.3 5.7 0.5 1.4 0.9 0.8 69.3 68.3

*Sino Ocean 3377 HK 3.23 3,128 3.2 8.0 59.6 6.8 6.3 3.9 5.4 0.5 0.5 58.5 57.9

Average 53.7 10.8 6.1 5.4 4.8 0.7 0.6 76.2 71.3

Sources: CMS (HK), * data sourced from Bloomberg

Note: We have excluded outliers (SOHO China & Poly Property) when measuring average P/Es

Company valuation

Figure 10: Discount to NAV Band (from listing onwards)

Sources: CMS (HK), Bloomberg

Note: CIFI has a relatively short listing history compared with its peers. The stock was previously under-researched, resulting in deep valuation discount.

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Price (

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$)

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+2SD = 46% discount

Mean = 60% discount

-1SD = 67% discount

+1SD = 53% discount

Friday, July 8, 2016

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Figure 11: CIFI’s end-FY16E NAV

Details Total HK$ mn HK$/share % of Total

Landbank and PUD 36,586 5.5 119%

Investment properties 5,225 0.8 17%

Net debts at FY16E year-end (11,176) (1.7) -36%

Total 30,635 4.6 100%

Source: CMS (HK)

Friday, July 8, 2016

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Financial Summary Balance Sheet

RMB mn 2014 2015 2016E 2017E 2018E

Current assets 30,052 53,488 60,589 69,544 78,298

Cash 7,094 14,874 16,205 17,335 18,069

Restricted cash 30 32 32 32 32

Current receivables 5,017 8,304 8,304 8,304 8,304

Properties held for sale 5,419 6,917 6,089 6,078 6,677

Properties under development & land prepaid 12,061 21,985 28,584 36,420 43,840

Other current assets 431 1,376 1,376 1,376 1,376

Non-current assets 13,487 13,963 19,111 19,105 18,236

Fixed assets 5,312 5,924 5,924 5,924 5,924

Interests in JCEs/Asso 7,907 7,699 12,847 12,841 11,972

Other non-current assets 268 340 340 340 340

Total assets 43,539 67,451 79,700 88,649 96,534

Current liabilities 20,111 29,733 37,661 42,179 45,797

Bank and other loans 3,035 2,794 2,794 2,794 2,794

Presales receipts in advance 5,016 10,396 17,922 22,281 26,078

Accounts & other payables 10,110 14,214 14,214 14,214 14,214

Other current liabilities 1,950 2,329 2,731 2,890 2,711

Non-current liabilities 12,431 22,435 24,435 26,435 28,435

Bank and other loans 11,411 21,161 23,161 25,161 27,161

Others 1,020 1,274 1,274 1,274 1,274

Total liabilities 32,542 52,168 62,096 68,614 74,232

Shareholders' Equity 10,205 12,827 14,814 17,093 19,285

Minority interests 792 2,456 2,791 2,942 3,016

Total equity & liabilities 43,539 67,451 79,700 88,649 96,534

Note: Total cash includes both cash and restricted cash

Cashflow Statement

RMB mn 2014 2015 2016E 2017E 2018E

Operating cashflow 2,390 11,426 8,345 2,834 1,641

Profit before tax 3,325 3,804 4,440 4,857 4,614

Working capital change 874 11,480 7,942 2,839 2,202

Tax paid (707) (1,882) (1,093) (1,353) (1,410)

Interest paid (1,263) (1,628) (1,984) (2,124) (2,264)

Other operating cashflow 161 (348) (961) (1,385) (1,502)

Investing cashflow (7,166) (12,693) (8,390) (2,790) (1,790)

Fixed assets additions 0 (13) 0 0 0

Deposits paid for land purchase (2,500) (8,800) (4,500) (4,500) (4,500)

Subsidiary acquisitions/disposals 39 2,054 0 0 0

JCE and associates movements (4,504) (4,894) (4,000) 1,600 2,600

Other investing cashflow (201) (1,040) 110 110 110

Financing cashflow 4,809 9,047 1,376 1,086 882

Dividend paid (333) (456) (624) (914) (1,118)

Issuance of shares 0 1,037 0 0 0

Increase/decrease in loans 1,206 5,910 2,000 2,000 2,000

Other financing cashflow 3,936 2,556 0 0 0

Cashflows for the year 33 7,780 1,331 1,130 733

Cash at the beginning 7,061 7,094 14,874 16,205 17,335

Exchange difference 0 0 0 0 0

Cash at the end 7,094 14,874 16,205 17,335 18,069

Profit & Loss Statement RMB mn 2014 2015 2016E 2017E 2018E

Revenue 16,179 18,231 17,396 17,365 19,077

Cost of goods sold (11,993) (13,844) (12,617) (12,451) (14,404)

Gross profit 4,186 4,387 4,779 4,913 4,673

Selling exp (319) (371) (570) (676) (757)

Admin exp (529) (607) (729) (766) (804)

Finance cost (386) (203) (298) (319) (340)

JCE & Associates (119) 173 1,148 1,593 1,732

Others 492 425 110 110 110

Pre-tax profit 3,325 3,804 4,440 4,857 4,614

Income tax (1,325) (1,334) (1,494) (1,512) (1,231)

MI (139) (375) (335) (151) (74)

Reported net profit 1,861 2,095 2,611 3,193 3,309

Core net profit 1,939 2,210 2,611 3,193 3,309

Core EPS (RMB) 0.32 0.34 0.39 0.47 0.49

DPS (RMB) 0.09 0.12 0.14 0.17 0.17

Note: We deduct property revaluations and other exceptional items to arrive at the core net profit

Ratios

% 2014 2015 2016E 2017E 2018E

Growth (%)

Revenue 36% 13% -5% 0% 10%

Gross profit 36% 5% 9% 3% -5%

Core net profit 28% 14% 18% 22% 4%

PUD and inventory growth -8% 65% 20% 23% 19%

Total contracted sales growth 38% 42% 42% 5% 5%

Profitability (%)

Gross margin 25.9% 24.1% 27.5% 28.3% 24.5%

Core net profit margin 12.0% 12.1% 15.0% 18.4% 17.3%

Effective tax rate 39.8% 35.1% 33.7% 31.1% 26.7%

ROE 19.8% 18.2% 18.9% 20.0% 18.2%

ROA 4.5% 3.8% 3.5% 3.8% 3.6%

Dividend payout 30% 36% 35% 35% 35%

Liquidity

Free cash flows (RMB mn) (4,776) (1,267) (45) 44 (149)

Total Debt - Total Equity Ratio 131% 157% 147% 140% 134%

Net Debt - Total Equity Ratio 67% 59% 55% 53% 53%

Interest coverage (x) 2.2 2.0 2.3 2.4 2.1

Note: We reclassify land capex from operating cashflows into investing cashflows, which is different from the company’s financial statements.

Sources: Company data, CMS (HK) estimates

Friday, July 8, 2016

To access our research reports on the Bloomberg terminal, type CMHK <GO> 7

Investment Ratings Industry Rating Definition OVERWEIGHT Expect sector to outperform the market over the next 12 months NEUTRAL Expect sector to perform in-line with the market over the next 12 months

UNDERWEIGHT Expect sector to underperform the market over the next 12 months

Company Rating Definition BUY Expect stock to generate 10%+ return over the next 12 months

NEUTRAL Expect stock to generate +10% to -10% over the next 12 months SELL Expect stock to generate loss of 10%+ over the next 12 months

Analyst Disclosure The analysts primarily responsible for the preparation of all or part of the research report contained herein hereby certify that: (i) the views expressed in this research report accurately reflect the

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recommendations or views expressed in this research report.

Regulatory Disclosure Please refer to the important disclosures on our website http://www.newone.com.hk/cmshk/en/disclosure.html.

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