R&F Properties (2777.HK) - Overseas business will become the driving force of new achievement
On December 1st, R＆F Properties published that its wholly owned subsidiary purchased a piece of Malaysian land covering an area of 116 acres at the price of 8.5 billion Yuan, which would be developed into residence and commercial properties. This land is located in Bandaraya Johor Bahru of Malaysia, including four vacant land parcels with permanent title and two sea-filling land parcels with permanent title, covering an area of 116 acres, which is approximately 500 thousand square meters.
While the area of property to be developed reaches 3.5 million square meters, including residence, commercial building, office building, hotel, etc. Moreover, the land expense of 8.5 billion RMB will be paid by four installments within three years.
In our opinion, it is the first overseas project of R＆F Properties with substantial investment, which will bring great significance to the expansion overseas for R＆F Properties in the future.
In other words, it is relatively wise for R & F Properties to select Malaysia as the first station of overseas expansion. Besides large-scale Chinese community, high income and insufficient development of real estate market, etc., Country Garden's successful experience of Golden Gulf in Malaysia will bring important reference function for the overseas expansion of R＆F Properties.
Moreover, the new land parcel obtained by the company is located in Bandaraya Johor Bahru along with Golden Gulf of Country Garden. The market environment, project positioning and target consumer of both projects possess similarities to some extent, although they are direct competitors, the operation risk of new project of R & F Properties has been reduced considerably, thus marketing strategy will serve as the critical factor of the project.
It is expected that this project will become the major source of income in 2015 and 2016, and its profitable level is better than that of domestic projects of R & F Properties, bringing stronger driving force of achievement subsequently. In November, 2013, the sales volume and sales area of R＆F Properties reached 3.114 billion Yuan and 242.8 thousand square meters respectively, increasing 7% and decreasing 7% on year-on-year basis, while the average price increases by 15% to 12825 Yuan/square meter.
The sales volume of the first 11 months of R＆F Properties in the year 2013 reaches 37.5 billion Yuan with the sales area of 3.08 million square meters, increasing 21% and 14% on year-on-year basis respectively. Here, R＆F Properties has completed 89% of the sales objective in 2013 of 42 billion Yuan, thus, in the last month, R＆F Properties has to complete 4.5 billion in order to achieve the objective. In our opinion, R＆F Properties will conduct sales promotion at the end of the year, along with the sales volume of contracts transferred from reservations, the sales objective of 42 billion will be realized easily.
According to the vision of managerial staffs, the sales scale and sales volume of contract of R＆F Properties will experience significant increase in the following two years. It is expected that the sales volume in 2014 and 2015 will reach 56 billion and 70 billion respectively with compound growth of 29%. If it goes smoothly, R＆F Properties will transfer to large-scale real estate company from middle-size real estate company, and the market will regard it as a proactive large-scale company dealing with real estate in multiple regions. Therefrom, we can catch a glimpse of the method of reinvigorating Shimao Real Estate, thus R＆F Properties will serve as the key real estate company all over the country in 2014. The mid-term achievement of R＆F Properties in 2013 shapes up. During this period, the income and core net profit of the company increase to 10.2 billion Yuan and 1.26 billion Yuan with growth rates of 21% and 35% respectively. The rapid growth of core profit benefits from the increase of delivery area, which rises to 970 thousand square meters with the growth rate of 84%, and 38% increase of the gross profit rate of property. In the middle term, earnings per share reach 0.4538 Yuan and dividends per share reach 0.21 Yuan with the dividend rate of 46%.
Currently, the sales region of R＆F Properties mainly covers north China and south China, taking Beijing, Tianjin, Taiyuan and Guangzhou as representatives, while west China and east China involve with strategy layout, taking Chongqing, Chengdu, Shanghai and Nanjing as representatives. Above all, the sales layout of R＆F Properties is different from most large-scale real estate companies, which mainly focus on east China and western part. R＆F Properties involves full extent in north China, covering most first-tier and second-tier provincial capitals, which is similar to the layout of Evergrande in core second-tier regions.
In the first half year of 2013, the newly constructed area and area in construction of R＆F Properties reach 2.83 million square meters and 9.17 million square meters respectively, increasing 25% on year-on-year basis. Therein, sellable resource reaches 44 billion Yuan, it is expected that the value of sellable property will exceed 80 billion Yuan at the end of the year, which has been enlarged considerably. Accordingly, the company adopts relatively proactive strategy of land reservation since 2013. In the first half year, the area of newly increased land reservation of the company reaches 7.8 million square meters, which is far higher than that of the same period in 2012. The acceleration of expansion of R & F Properties brings significant pressure for the balance sheet of the company. By the end of June, the total debt of the company has considerably increased 10.2 billion Yuan to 45.8 billion year compared with last year, the net indebtedness has increased 3.8 billion Yuan to 26.6 billion Yuan, while the net debt to equity ratio soars to 101% from 86%, thus the financial risk increases. The significant increase of debt ratio mainly results from the strategy of land expansion adopted by R & F Properties in the first half year.
In our opinion, the development strategy of expansion along with the significant increase of financial leverage is a common phenomenon in real estate field. The sufficient sales cash, various layouts of project region and gradually mature commercial real estate, all guarantee the normal operation and relatively strong capacity of debt payment of the company.
In the following two years, R & F will continue to expand, therefore, it is difficult for the debt scale of the company to decrease significantly. It is expected that the managerial staffs will keep the current dividend rate of 40%, which can exert positive effect on financial evaluation of investors. The strategy of positive expansion adopted by R＆F Properties changes sales scale, sales volume and finance. Currently, the company is transferring to large-scale real estate enterprise from middle-size real estate company. In the following two years, it is expected that the sales volume of the company will advance by leaps and bounds. We can catch a glimpse of the method of reinvigorating Shimao Real Estate this year, while R＆F Properties will be the key real estate company all over the country in 2014. The increase of sales volume and opinion change of investors will promote the share price of the company significantly. Moreover, the substantial promotion of overseas business will provide new driving force for the achievement of the company.
In our opinion, R＆F Properties will become the most valuable object among real estate companies in 2014. Therefore, we give the rate of "Buy" to R＆F Properties and target price of 12 months will reach 15.8 Hong Kong dollars, which amounts to 5.8 times of expected price earning ratio in 2014.
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