Shanghai Shimao Co Ltd:Maintain Sell for vague sales and profits growth outlook

Maintain Sell on vague sales growth and profit outlook。

    We maintain Sell on Shanghai Shimao with our target price adjusted up by 5%to RMB4.55after factoring in faster sales, better margin and 1H17results. Yet,despite a 59% yoy increase in revenue to RMB10.1bn and 11.6ppt grossmargin expansion, core profit was declined by 14% yoy to RMB1.07bn,dragged by the low attributable profit and erosion of profit by LAT for highmargin project. Due to the low land acquisition and poor execution trackrecord, we remain cautious on its sales growth outlook and expect sale growthwill likely slowdown to 16%/8% in FY18/19F (vs. +24% in 2017F). On valuation,its P/E and NAV discount are both higher than other quality large cap names.。

    Stronger-than-expected sales, but expecting slowdown ahead。

    Shanghai Shimao achieved stronger-than-expected sales with a 33% yoyincrease in 1H17to RMB10.0bn and GFA sold increased by 15% yoy to530ksqm. The company achieved 59% of its full-year target. Yet, due to thepoor track record on execution (contracted sales -16%/+33% in FY16/1H17vs.peers +50%/+55%) and the limited land acquisition in 1H17, we expect salesgrowth will likely be slowed from +24% in 2017F to 16%/8% in 2018/19F.。

    LAT erodes gross margin expansion。

    The gross margin of Shanghai Shimao increased by 6.7ppt from end-2016to38.5% (due to the strong sales of two projects in Xiamen Jimei and NanjingYuhua), which is stronger than our expectation. Yet, the core net profit wasdown by 14% yoy. The 2.5x surge in LAT eroded gross margin improvement.。

    Disappointing results, strong sales not translating to earnings。

    Shanghai Shimao reported disappointing 1H17results: 1) revenue jumped by59% yoy to RMB10.1bn; 2) gross margin expanded by 11.6ppt to 38.5%; 3)due to the strong MI, attributable profit was flat at 1.4bn and core profitdropped by 14% yoy to RMB1.07bn and 4) gearing was down by 12ppt to12%; no DVD was declared. As a result of the 2.8x yoy increase in minorityinterest, the attributable profit was flattish. Strong sales growth and doubledigitmargin expansion cannot translate to positive profit growth.。

    Valuation and risks。

    Our target price is based on a 35% discount to end-2017F NAV of RMB7.00.The stock now trades at 9.6x FY18F P/E and a 26% discount to NAV. Key risksinclude: 1) stronger-than-expected contracted sales, 2) better-than-expectedrental growth and 3) faster-than-expected gross margin expansion.。