AMTD Research has published the report on China Aoyuan (3883.HK). We reiterate Buy rating with a target price of HK$14.35/sh. We reiterate our Buy rating on Aoyuan. We find the stock’s valuations of 3.1x 2020E P/E attractive, especially considering its 2020E 53% YoY earnings growth is already largely secured through unrecognized sales. 2020E Contracted sales is set to grow by another 12% YoY to RMB132bn despite the recent disruptions by COVID-19.
3.1x 2020E P/E and 7.3% div yield stock on 53% earnings growth
We believe the stock is trading at unwarranted distressed valuations of 3.1x 2020E P/E and it offers investors an attractive entry point. The developer’s 2020E 53% net profit growth is highly visible as it is already largely secured by unrecognized sales. Meanwhile 2020E contracted sales is still set to grow by another 12% YoY to reach RMB132bn (based on a 60% sell-through rate) despite the disruptions from the COVID-19. We reiterate our Buy rating and Aoyuan remains as one of our top picks of the sector.
53% YoY 2020E net profit growth largely secured
With RMB86bn of contract liabilities (132% of 2020E revenue) on Aoyuan’s balance sheet as of end-2019, we believe our 2020E earnings are already largely secured by unrecognized sales. We thus believe that the developer is on track to deliver a 53% YoY earnings growth in 2020E, among the high-end of our coverage universe. While we believe there are downside risks to our 2020E GP Margins, but it will be offset by stronger than expected revenue recognition as a result of Aoyuan’s high asset turnover model, underpinning its 34.0% 2020E ROE.
2019 results in-line with consensus expectations
Aoyuan announced a 2019 core attrib. net profit of RMB4,122m, up 60% YoY, in-line with bloomberg consensus estimate (RMB4,213m). GP Margins was at 29.7%, declining slightly from 31.1% of 2018. Core Net Margins came in at 10.1% (2018: 9.9%). The developer continued to maintain a solid balance sheet with Net Debt to Equity at 74.9% (1H19: 64.2%), while Total Assets to Equity stood at 7.8x (1H19: 6.6x).
GBA Urban Redevelopment remain as the key earnings growth driver
We believe Urban Redevelopment projects in the Greater Bay Area (GBA) will continue to be Aoyuan’s key earnings growth driver in 2020, with ~33% of its total land bank value in urban redevelopment projects. This segment will also underpin the developers’ profitability going forward, as these projects generally have a more favourable land cost compared to the more competitive land auctions. Aoyuan has now developed a ~240 person team to drive the urban redevelopment business’ execution, with ~30 urban redevelopment projects on their land bank. Among these projects, 89% are in the Greater Bay Area, which will continue to be a key strategic region of economic growth.
At 3.1x 2020E P/E, valuations have approached distressed levels
Aoyuan is currently trading at 3.1x 2020E P/E (vs industry average of 4.2x P/E), which we believe have already priced in downside risks regarding slower growth and offshore debt refinancing risks. We maintain our Target Price of HK$14.35/sh, which is based on a 5.5x 2020E P/E.
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