Excerpts from latest analyst reports...
UOB: ‘OVERWEIGHT’ call maintained on PRC PROPERTY
UOB Kay Hian said it is maintaining its ‘overweight’ call on Hong Kong-listed PRC property firms, with China Overseas Land & Investment Ltd (HK: 688; target: 19.20 hkd) and SOHO China Ltd (HK: 410; target: 8.05 hkd) its ‘top buys’.
“Mainland developers have typically fallen 25-35% since August 1 vs HSCEI's 18% decline. The under-performance reflects the sector's high beta and cyclical nature, and is also aggravated by the latest concern that a slowing property market will hurt the cash flow of developers whose gearing has already risen in 1H11,” UOB said.
It added that the overall financial position of the sector is “still not bad.”
“While we share the view that a tight financial position is an uninviting feature now, this only applies to a few companies. The average gearing of our sample of 16 companies rose from 50% to 63% in 1H11, which is high but not unacceptable. Only six had gearing of over 70% in June 2011.”
Firms still safe when macro fundamentals worsen? In a scenario of macro fundamentals worsening, UOB said it wants to see which developers' financial positions could deteriorate to a level by the end of the year that arouses serious concern.
For this, the brokerage said it calculates monthly contract sales each company will have to garner for the rest of 2011 in order to maintain its June 2011 net debt level, i.e. to avoid additional borrowing from banks. This means companies will have to generate enough property sales, on top of recurrent income, to cover the committed expenses in the second half such as land premiums, construction costs and general expenses.
“We have made the following assumptions in our calculations: a) there is no delay between sales and when cash is actually received (but even if there is a gap, we do not see that altering the results much), b) there will be no further landbank acquisitions in 2H11, and c) developers in a tight funding position will not slow down construction to conserve cash”
Four firms at risk in 2H Nine companies will have to generate higher contract sales h-o-h to maintain their net debt level,” UOB found.
“But fortunately for all of them, there will be more sales resources in 2H11, hence the required sell-through rate is lower than that achieved in 1H. That said, the situation will be tight for six of them: CR Land, Poly HK, Evergrande, Guangzhou R&F, Sino-Ocean Land and Shimao.
“Of these six companies, four had gearing of over 70% in June 2011: Poly HK, Evergrande, R&F and Shimao.”
It added that four developers currently had tight finances.
“Against a deteriorating macro backdrop, investors will avoid companies on high gearing even more than usual. The six companies in our sample recording >70% gearing in Jun 11 were: Poly HK, R&F, Shimao, Evergrande, Agile and Glorious. Among them, four had a lower cash level than short-term debt in June: Glorious, Poly HK, Agile and Sino-Ocean Land.”
The safer counters On the other hand, COLI compares well with peers with only 39% gearing in June and faces the least pressure to generate sales to achieve cash flow balance in 2H11,” UOB said.
“Longfor, SOHO China and Country Garden are the other three stocks that fare well in this exercise.”
See also: PRC PROPERTY, AUTOS, ZIJIN MINING, TENCENT: What Analysts Now Say...
UOB: ‘UNDERWEIGHT’ call maintained on PRC AUTO SECTOR
UOB Kay Hian said it is maintaining its ‘underweight’ recommendation on China’s struggling auto sector, with 'top sells' being BYD (HK: 1211; target: 9.60 hkd) and Great Wall (HK: 2333; target: 7.40 hkd).
Last week, UOB checked with Zhengtong (HK: 1728; not rated) and Zhongsheng (HK: 881; not rated) -- two big car dealers in China – on recent developments in the automobile market.
Sales momentum of luxury cars – Audi, Bentley, Lamborghini, Land Rover and Porsche – remained resilient in 3Q11. Sales of BMW and Mercedes-Benz slowed down in August due to capacity bottlenecks and a restructuring of sales networks, respectively. Prices of luxury cars held up well.
Competition in the mid-range car market is intensifying.
“Nissan, Toyota and Honda are offering bigger discounts in 4Q11. Automakers want to fight for market share via price cuts, and dealers cut prices to clear excessive inventories,” UOB said.
It added that it prefers the high-end segment over mid- and low-end segments, given the buoyant demand for luxury cars, firm pricing and healthy supply/demand balance.
“Within the high-end segment, we prefer automakers, e.g. Brilliance (HK: 1114; ‘buy’), to car dealers because the former has overwhelming bargaining power against the latter. For instance, to spur growth, carmakers can appoint more dealers to open stores, diluting sales of existing dealers.”
It said that among Hong Kong-listed dealerships, it is “cautious” on Zhengtong and Zhongsheng given their sustained weak cash flow and appetite for cash on the back of aggressive M&A plans.
See also: Troubled PRC Automaker BYD Eyes 70% Staff Cuts... Will Buffett Bail Too?