Shanghai Shimao Co Ltd:Maintaining Sell for expensive valuation and weak earnings outlook

Maintaining Sell with 14% potential downside

    We maintain our Sell rating, but raise the TP by 5.4% to RMB6.33, afterfactoring in the FY16 results and latest land acquisitions. We think the currentvaluation of the stock is still expensive at 12.5x FY17F P/E (vs. Vanke A’s 9.6xand Gemdale’s 10.9x), despite its improving sales visibility. Our TP implies 14%potential downside from the current price.

    More expensive valuation than large-caps

    SH Shimao is now trading at 12.5x FY17F P/E and only offers 1-2% dividendyield in the next three years, which is much more expensive than large-caps(Vanke A’s 9.6x P/E and 4-5% yield; Gemdale’s 10.9x P/E and 2-3% yield),based on our estimates. Also, the company’s ROE is low at ~8% (vs. Vanke A’s19% and Gemdale’s 11%). We think the weaker fundamentals of the companydo not justify its current high valuation.

    Earnings are still lagging behind

    Due to its weak sales and the RMB1.1bn disposal gain last year, we expect SHShimao’s core earnings to decline 6% yoy to RMB1.6bn in FY17F, despite thegross margin possibly expanding further to 32.9% (vs. 31.9% in FY16).

    Improving sales visibilityGiven the low base in 2016 (-16% yoy), we expect the company to grow itscontracted sales by 27% to RMB19.0bn in 2017F (which is only 7% higher thanits 2015 sales), and grow another 27% to RMB24.1bn in 2018F.

    Core earnings up 9% to RMB1.7bn including asset disposal

    SH Shimao reported decent FY16 results: 1) revenue was down 12.2% yoy toRMB13.7bn; 2) gross margin recovered to 31.9% (vs. 29.8% in FY15); 3) coreprofits increased 8.6% yoy to RMB1.7bn (including RMB1.1bn asset disposalgain to Leshi); and 4) net gearing remained stable at 23%. The companyproposed a final dividend of RMB0.08/share, implying a 1.1% dividend yield,based on the current price.

    Valuation and risk

    Our TP is based on a 35% discount to end-2017F NAV of RMB9.74. The stocknow trades at 12.5x FY17F P/E and a 27% discount to NAV. Key risks include:1) stronger-than-expected contracted sales, 2) better-than-expected rentalgrowth; and 3) faster-than-expected gross margin expansion. See p. 3.