KT: 2010

Monday, 15 November 2010

Yue Xiu Property - The Sleeping Dragon Awakens

Guangzhou-based property developer, Yuexiu Property Company Limited
(Yuexiu), is an SOE that has transformed from a conglomerate into a pure property
play after a series of business restructuring. Its parent is Yue Xiu Enterprises, the
principal investment vehicle of the Guangzhou Municipal Government. Currently,
Yuexiu has a landbank of 9.2m sqm, with 7.1m sqm in Guangzhou and the rest in
Zhongshan, Jiangmen, Foshan, Yantai and Hong Kong.

 Business restructuring and management reshuffling an attractive story.
Yuexiu has undergone major restructuring in the past few years to become a
pure property developer. There were also substantial changes in its upper
management in 2008. We believe such changes would trigger a new round of
growth within the company.

 Yuexiu benefits from its SOE status. As an SOE, Yuexiu not only enjoys
lower borrowing costs from Guangzhou banks, it is also able to borrow more
readily in Hong Kong where the lending rate is significantly lower. Yuexiu is
also able to negotiate for higher plot ratios for its property development
projects, which can be difficult to obtain in China.

 The “Three Old Redevelopment” programme in Guangzhou provides
ample opportunities. Under this programme, old urban areas, old villages and
old factories in Guangzhou would be redeveloped. As a Guangzhou-based
SOE, Yuexiu is very likely to be a beneficiary. The company is currently in
talks with its parent and the Guangzhou government to acquire an old factory
site under the programme from its parent.

 Strong earnings growth expected in 2010-12. With increasing margins and
more projects in the pipeline for the next few years, we project Yuexiu to
deliver core net profit of Rmb900m in 2010, Rmb1,598m in 2011 (+78%) and
Rmb2,152m in 2012 (+35%).

 Initiate coverage with BUY. We estimate Yuexiu’s end-10 NAV for its
existing landbank at Rmb34.36b, or HK$4.33/share. Our target price of
HK$3.00 represents a 30% discount to end-10 NAV, slightly lower than the
sector average of 37% discount and implying a 38.9% price upside.