AMTD Research has published the report on Redsun (1996.HK). We maintain our Buy rating with a target price of HK$3.32/sh. Redsun announced a solid 2019 balance sheet, despite a weaker than expected core attrib. net profit growth. We believe this solid balance sheet will offer management with flexibility to react to the uncertain macro environment, ensuring the developer’s long term stability.
A solid balance sheet to underpin a 15% contracted sales growth
Redsun has successfully deleveraged its balance sheet to a Net Debt to Equity of 70.4% and Total Assets to Equity of 5.3x during 2H19. The developer targets to achieve a contracted sales of RMB75bn during 2020, based on a sellable resources of RMB110bn. The target sell-through rate of ~68% is higher than industry average (60%). Therefore, we believe there may be potential upside surprise in contracted sales growth, if the developer successfully identifies attractive acquisition opportunities that can add to its 2020 sellable resources.
2019 results slightly below our expectations on higher SG&A and MI
Redsun reported a core net profit of RMB1,415.2m, growing 25.8% YoY. However, core net profit attributable to shareholders was only at RMB1,247m, up by only 3% YoY. The core attrib. net profit was 9% below our expectations, mainly due to a higher than expected SG&A and high portion of Minority Interests. 2019 SG&A as percentage of contracted sales rose to 2.7% (2018: 2.2%), which is still reasonable and in-line with industry average. On the other hand, minority interest was 69% higher than our expectations.
A deleveraged balance sheet provides ammunition for 2020
Redsun’s Net Debt to Equity has declined to 70.4% at end-2019 (1H19: 76%), while Total Assets to Equity has declined to 5.3x at end-2019 (1H19: 5.74x). We believe such a solid and healthy balance sheet gives management the flexibility to either remained disciplined to further lower financing costs, or take advantage of attractive land acquisition opportunities that may arise in 2020 and underpin its contracted sales growth. In the current uncertain macro environment, such a flexibility will ensure the developers’ long term stability, in our view.
Challenges needed to be overcome during national expansion plans
As Redsun continues to grow from the 2019 contracted sales levels of RMB65bn, expansion outside of Greater Jiangsu Region is inevitable. The developer entered into 17 new cities during 2019, including Jinan, Qingdao, Xi’an, Changsha and Zhengzhou. We believe it will take time for Redsun to develop its operational network and execution capabilities in these cities outside of its home turf of Jiangsu/Yangtze River Delta. 2020 will be a year which the developer continue to strengthen its foothold in these cities/regions which will be the springboard for future growth.
Stock is trading at 3.4x 2020E P/E slightly below industry average
Redsun is currently trading at a 3.4x 2020E P/E, which is slightly below industry average (4.2x). At such valuations, we believe the market has already factored in the slower-than-expected 2019 core net profit growth and potential upside surprises in contracted sales could spark a rally in share price. Our Target Price of HK$3.32/sh is based on a target 2020E P/E of 5.0x, offering 33% upside to current share price.
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