Sino-Ocean Land Holdings - Expanding landbank in Beijing

Sino-Ocean Land Holdings posted robust sales figures for the January-April 2009 period. Total sales reached RMB4.6bn, already 57.5% of this year’s RMB8bn contracted sales target, selling 470,000 sq m of developments. Cumulative January-April sales are 800% higher than the 2007 level. On an annualised basis — and assuming continued strength — we believe sales would be on track to reach RMB13.8bn for full-year FY09F.

Given strong sales, the company’s several projects have also witnessed a gradual rise in ASP. The ASP of Ocean Landscape Eastern Area Phase III trended up from RMB11,000/sq m to RMB14,000/sq m. Moreover, additional high-end products with higher margins are slated to be rolled out during 2H09F, including Ocean La Vie and larger-size units (200sq m) at Ocean Great Harmony.


In view of Sino-Ocean’s strong y-t-d contracted sales, as well as our forecasts for a continued strengthening in property market conditions, record nationwide sales volume in 2010F, and residential price rises of 10% in 2009F and 15% in 2010F, we increased our contracted sales volume, ASP and value assumptions for FY09F, FY10F and FY11F, respectively.

We estimate that Sino-Ocean Land will run out of landbank in Beijing by end-2010F if the current pace of sales continues. As such, we think acquiring additional land should be a top priority in the company’s work plan this year. We believe management was earlier looking to acquire 1-1.5mn sq m of new land this year.

In our view, Sino-Ocean Land’s visibility in terms of landbank acquisition is one of the best among its peers. This is because the company is now involved in the primary development of five plots of land for the government in Beijing. Of the five plots, two are next to the company’s existing projects, Ocean Landscape Eastern Area and Poetry of River. Thus, we consider it very likely that the Beijing government will award these pieces of land at a reasonable price to Sino-Ocean Land for the next phase of development.

In our earnings model, we have assumed that Sino-Ocean Land would acquire five plots in Beijing this year with a GFA of 1.6mn sq m. We estimate the total cost would be RMB5.73bn. Sino-Ocean Land has ample funds to make these acquisitions, in our view, given that at end-April 2009, the company had some RMB10bn in cash. Moreover, we believe its application for issuance of RMB2.5bn in domestic bonds will likely be approved by the NDRC by end-June 2009.

We reaffirm our BUY call on Sino-Ocean Land with a 12-month price target of HK$11.59. Currently, the stock is trading at 7.9x our FY10F earnings forecast, which remains reasonable, in our view. On a 12-month rolling forward P/E band analysis, Sino-Ocean Land’s P/E of 14.2x remains below the stock’s historical average of 17x.

Risks. We believe the key risk to our call on Sino-Ocean Land is the company’s concentrated exposure to Bohai Bay. If Bohai Bay market conditions were to reverse sharply, it could affect Sino-Ocean Land’s revenue and profits in FY09F and FY10F.

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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.