• Reported bottomline numbers are misleading, distorted by exceptional items, which includes a revaluation loss on its investment properties amounting to RMB488m. FY08 core net loss of RMB35.1m is a vast improvement from the core net loss of RMB256.9m in FY07.
• This is ahead of the RMB43.7m net loss we previously estimated the difference due to higher mark-to-market valuation loss related to the repurchase of convertible bond in FY08, which are essentially non-recurring.
• CNTD was hit by the deterioration of the retail rental market. The group has provided a revaluation loss of RMB488m for the investment properties in FY08. Though not quite articulated, the group could potentially reverse the overprovision should there be a recovery of the rental market condition going forward.
• Financing cost, going forward will be greatly reduced as the increase in capitalization of the interest expenses kick in, in tandem with the progress of construction works.
• Balance sheet seems constraint after the repayment of RMB503m Shanghai project loan in FY08. However, we think that the company will still be in good stead as it has secured RMB96m facility last month to meet FY09 working capital need.
• Additionally, CNTD is finalizing its project financing facility that will step in after the group repays the RMB1.1bn Shanghai Luodianproject loan that is due in Sept09.
• We understand from management that the term of the project financing will be favorable as Municipals are now pushing ahead on various infrastructure projects to pump prime the economy.
• The relaxation of austerity measures, which included temporary exemption of the land appreciation tax could eventually lead to a revived property sector and attract developers’ interest once again.
• Though details are not given, CNTD said that it will be concluding another parcel of land auction in Shanghai next month, and has talked to about 20 developers to date.
• The group is confident that its various projects (in different provinces at different stages of development) will continued to generate decent gross profit margins between 45-50%. In addition, CNTD has also gradually built up its source of stable income streams through investments in golf courses, hotels, commercial and retail space operations, as well as hospitals and schools.
• We slashed FY09 earnings quite drastically by 74% as we realign our assumptions by imputing the pushing back of income recognition schedule for various projects. Consequently, we upped our FY10 estimates by 81% to incorporate all future contribution of these rescheduled projects.
• Reiterate Buy and target price reduced to S$0.05. Still pegged at 3.8x CY09 P/E, we derived a lower target price of S$0.05 (from S$0.17) due to earnings cut. Given a 33% upside from this level, we maintain our Buy rating. A better land auction outcome and the group’s successful refinancing activities would catalyses share performance.
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