We like Sinic’s new industrial land acquisition approach because it introduces theme park operator in negotiating with the government together and only needs to pay for the residential part if successful. If it could replicate this in more cities (such as Nanchang), this would support group sales/margin in a longer term. As for this year, we expect Sinic to record 15-20% sales growth and continue to focus on improving cash collection, funding improvement and attributable sales ratio. Maintain BUY.
- Expect Sales to grow 15-20% this year. The Company recorded 25% YoY sales growth in 2020 to RMB 114bn. Due to the restriction of “three red line” on debts (<10% YoY growth for Sinic), we expect it to record 15-20% sales growth this year (with 45% attributable ratio). It has achieved RMB15.9bn in 2M21 (+124% YoY) with ASP reaching a new high at RMB15,400/sq m. It represented 12% of its annual target, in line with the industry. Also, Sinic will gradually improve attributable sales ratio and this would be seen in the 1H20 land acquisition with 72% attributable ratio.
- Breakthrough into industrial land acquisition: apart from public land bidding and M&A, the Company has strategically looked for industrial land acquisitions opportunities. In Chengdu, it is negotiating with the government on a theme park land plot via the asset light model. This means the theme park part will be built and operated by a third party while Sinic only needs to pay for the residential part. If it succeeds, it may bring about RMB 10bn saleable resources with gross margin >30% to the Company. Sinic is also trying a similar approach at its home base Nanchang and we may expect 15-20% of its land acquisition from this channel.
- Improving balance sheet with lowering funding rate. Since IPO, Sinic has improved its net gearing from 238% in 2018 to 66.2% in Jun 2020 and we expect it to stay below 80% due to disciplined land acquisition strategy (<40% of its sales). We think the next target is to bring liability/asset ratio back within the requirements of “three red line” and the key is to improve the cash collection ratio from 80% in 2020 to industry average of >85%. On the funding side, Sinic is also trying to lower the ratio of trust loans (from 36% in 2019 to 23% in 1H20 at 10-11% rate) by using offshore bond and syndicated loans. This would further help lower the overall funding rate.
- Maintain BUY. Due to the COVID impact on completion, we trim core net profit to RMB1.94bn in 2020 from previous RMB 2.58bn. As a result, we also lower our end-20 NAV forecast to HK$9.90 from HK$10.11. Accordingly, we cut our TP to HK$4.95, representing a 50% discount to NAV. Maintain BUY.
