Sino-Ocean Land - Bond issue to support landbank acquisitions in 2H09

Sino-Ocean announced a Rmb2.6b bond issue in the domestic market. The six-year bond has a tentative coupon rate of 4.4-5% in the first three years. At the end of the third year, investors have the right to sell the bond back to Sino-Ocean, while the company has the option to increase the coupon by 0-100bp from the fourth year. The bond proceeds will be directly or indirectly used in land purchases, property developments and the restructuring of borrowings.

Sino-Ocean is ready for landbank acquisition. Thanks to the bond issue, the company can secure low-cost borrowings at interest rate even lower than the current three-year benchmark borrowing rate of 5.4%. Meanwhile, thanks to its strong property sales, the company’s current net gearing is at a low level of about 30%. Sino-Ocean is financially ready for landbank expansion. It plans to acquire 0.5m-1.0m sqm of landbank this year with an upper limit of target net gearing of 60%.

Beijing and Pan-Bohai Rim remain key market focus. Currently, Beijing and Pan-Bohai Rim account for 42% and 78% of Sino-Ocean’s total NAV respectively. It has become the largest developer in Beijing in terms of sales. Sino-Ocean has also outperformed the market, increasing its market share from 2.0% in 2007 to 4.6% in 2008 and 5.2% by end-Apr 09. The company’s potential landbank acquisitions will mainly focus on the Pan-Bohai region, in particular, its home market, Beijing, which should further strengthen its position in the capital city.

Projects from its primary land developments could be the targets. According to management, two of its primary land development projects could be put on the market in 2H09. One is a parcel with a GFA of more than 100,000sqm in the south of its Ocean Landscape project. The other is the Zhongfu project with a total GFA of more than 300,000sqm in the CBD of Beijing. The primary land development could give developers competitive advantages in land auctions, mainly due to: a) their better knowledge about project planning, environment as well as local demand and supply dynamics, b) savings on development costs as they already had research and planning inputs in primary land development, and c) shorter planning and construction period given sufficient preparation before the property development. On the other hand, the company might have to give up if the land auction prices are extremely high.
Robust sales. Sino-Ocean reported its ytd contracted sales at Rmb6.5b, representing about 80% of its 2009 sales target of Rmb8.0b. The company has decided to postpone the presale of Ocean La Vie, a top-end villa project in Beijing, to next year in order to ride on the uptrend in housing prices and maximise the returns. Management estimates the project could achieve an ASP of above Rmb50,000/sqm currently vs Rmb45,000/sqm early this year. Given the flexible presales launch criteria in Beijing (presale allowed once the foundation work is completed), the company can speed up the presale launches of other projects. The company is fully confident o achieving its sales target.

Some 85% of 2009 sales locked in. About Rmb5.4b of 2008 presales was carried forward to 2009 and we estimate Rmb4.3b of the presales to be booked this year. In addition, we estimate Rmb2.3b, or 35% of the ytd sales of Rmb6.5b, can be booked in 2009. Hence, Sino-Ocean has secured a total of Rmb6.6b, or 85% of our estimate 2009 sales of Rmb7.8b.

Price hikes to lift margins. We estimate the company has lifted selling prices for the projects in Beijing by 10-20%, and projects outside of the capital city also saw a moderate pick-up over the past couple of months. Among the projects, Ocean Great Harmony’s ASP increased from Rmb22,000/sqm to Rmb26,000/sqm, while Ocean Landscape East also saw prices increased from Rmb11,000/sqm as at end-08 to the current Rmb14,000/sqm. Thanks to the price hikes, we estimate Sino-Ocean’s gross margin to improve substantially from the low of 27% in 2009 (due to price cuts last year) to 34% in 2010.

The stock is trading at a 3% discount to current NAV of HK$8.21/share vs the sector’s 10% discount. With a solid track record in property sales and strong positioning in the Pan-Bohai Rim, Sino-Ocean has proven to be a quality and leading state-owned property company after COLI and CRL. In addition, the strong landbank replenishment potential on the back of low net gearing is a plus. We believe Sino-Ocean deserves a premium valuation over its peers. Our target price of HK$9.78 represents nearly a 20% premium to its NAV.

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