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研究部 (Research Team)
輝立証券

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Hopson Development Holdings Limited (0754.HK) Better-than-expected growth, cautious on financial risk

Wednesday, May 7, 2008

5642

Hopson Development Holdings Limited(754)

Recommendation on 7 May 2008
Recommendation	Buy
Price on Recommendation Date	$16.640
Target Price	$20.340

Weekly Special - 3306 JNBY Design Limited

Summary

Recently, Hopson Development Holdings Limited (Hopson or Company) released 2007 performance report. In fiscal year of 2007, the Companys attributable profit to shareholders reached up to HK$ 3.517 billion, rose by 126% year-on-year, turnover climbed to HK$ 11.131 billion, rose by 61% than 2006. In addition, basic EPS rose by 100% to HK$ 2.54, net asset value per share rose by 113% to HK$ 13.64.Hopsons 2007 performance exceeded our expectation, with turnover and net profit were about 15% higher than our forecast. We give Hopson “Buy” rate, 12-month target price at HK$ 20.34, 22.24% premium increase than current prices. Recently the Companys stock price has gone up a lot, please note the short-term risk when purchasing.

Figure 1: Turnover regional sales distribution

Source: Companys annual report

Sharp sales increase drove performance

2007 GFA for delivery was 1.129 million sq.m., rose by 17.2% comparing with 963,000 sq.m. in 2006, and basically in line with our estimate, while settlement price was higher than our expectation. Average unit settlement price for 2007 was RMB 9,270, rose by 29% than RMB 7,205 for 2006, which was mainly owing to continuous strong demand on high grade property and good performance for property market.

Figure 2: Price increase in different regions

Source: Companys announcement

Guangzhou and Beijing still are major sales regions

Contract sales for Hopson in 2007 was RMB 10.69 billion. Contract sale for 2007 was mainly from Guangzhou, Beijing, Shanghai, Tianjin and Huizhou these five cities, of which, proportion for income from Guangzhou and Beijing exceeded 75% of total sales, and sale income for Tianjin and Huizhou enjoyed a rapid rise. On the aspect of price, there was surprising rise for sale income for Guangzhou and Beijing, which respectively climbed by 50% and 55%, unit sale price also reached up to RMB 11,975 and RMB 17,283.While owing to products positioning and sale strategy, there was smaller increasing price for Shanghai business.

Table 1: Sales general view for cities

Source: Companys annual report, Phillip Securities

Diversified regional land bank structure

In 2007, Hopson acquired land bank with GFA of 7.54 million sq.m., furthermore, there was also undertaking acquisition for 11.73 million sq.m. land bank. At the end of 2007, land bank for the Company was about 21.19 million sq.m.

We believe that in comparing with the Companys current sale scale and turnover rate, Hopson has a comparative larger land reserve. Meanwhile proportion for undeveloped property was greatly large, beyond 80%, and land leasing fees and land value-added tax would constitute certain threat to cash flow. In addition, there were some new characteristics represented by increased land bank, proportion of non-Guangzhou region land was gradually rising, land bank proportion for second level cities climbed, which also suggested that the Companys management intended to decrease density for land bank, to avoid operating risk.

Figure 3: Land bank development and regional structure

Source: Companys annual report

Liability ratio dropped, amount of loans soared

At the end of 2007, assets-liability ratio for Hopson was 58%, 10% dropped than that of 2006.Net liability to equity ratio dropped by 53%, while the figure for 2006 was 73%.Liability ratios decrease was mainly caused by the Companys new share issuance on acquisition of a piece of Beijing land, and sharp rise for shareholder equity in 2007.

Figure 4: Loans structure changed

Source: Companys annual report

Despite liability ratio dropped, while which would not cover the fact that loans soared for Hopson. In 2007, total loans for Hopson reached up to HK$ 13 billion, soared by HK$ 4.43 billion than HK$ 8.57 for 2006.At the same time, loans structure also changed, 2-5 year term loans sharply rose.(See the figure) In addition, comparing with 2006, cash and bank deposit dropped by HK$308 million to HK$ 2.262 billion. On all accounts, short-term financial situation for Hopson was unoptimistic.

Risk

Governments regulation on real estate industry will have a negative impact on capital collection and land acquisition, and therefore increase the operating risk for the Company. The continued deterioration for external economic environment would affect consumers confidence, resulting in a reduced housing demand and further affected the Companys profit.

Valuation

In 2007 GFA sold while undelivered for Hopson was 510,000 sq.m., with amount of sales was RMB 5 billion, which was expected to be confirmed in early half 2008.According to estimate, in 2008, expected GFA completed would reach 1.69 million sq.m., with turnover was hopeful to reach to HK$ 16.1 billion.

Figure 5: NAV per share trend

Source: Companys annual report

After calculation, by the end of 2008, Hopsons NAV per share would reach to HK$ 25.43.With consideration of current market environment, the Companys market competitiveness and other factors, we give a discount of 20%, with coming 12-month target price at HK$ 20.34, 22.24% higher than current price. We give Hopson Buy” rate.

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