Initiate with Buy for quality landbank,high dividend yield,cheap valuation

Deutsche Bank Markets Research Rating Buy Asia China Property Property Company KWG Date 8 August 2017 Initiation of Coverage Initiate with Buy for quality landbank, high dividend yield, cheap valuation Reuters Bloomberg Exchange Ticker 1813.HK 1813 HK HSI 1813 Forecasts And Ratios Year End Dec 31 2015A 2016A 2017E 2018E 2019E Sales (CNYm) 8,339.8 8,865.3 12,588.2 14,789.5 19,082.7 DB EPS growth (%) -1.1 10.6 9.2 17.0 14.5 PER (x) 5.4 4.3 4.5 3.8 3.3 DPS (net) (CNY) 0.29 0.51 0.36 0.43 0.50 Yield (net) (%) 6.1 12.4 7.7 9.2 10.5 Source: Deutsche Bank estimates, company data Initiate with Buy for quality landbank but cheap valuation ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. Price at 7 Aug 2017 (HKD) 5.48 Price target - 12mth (HKD) 7.49 52-week range (HKD) 6.34 - 4.23 HANG SENG INDEX 27,563 Stephen Cheung, CFA Research Analyst (+852 ) 2203 6182 stephen-a.cheung@db.com Jeffrey Gao, CFA Research Analyst (+852 ) 2203 6256 jeffrey.gao@db.com Jason Ching, CFA Research Analyst (+852 ) 2203 6205 jason.ching@db.com Foo Leung Research Associate (+852 ) 2203 6239 foo.leung@db.com Price/price relative 4.04.44.85.25.66.06.46.88/152/168/162/17KWGHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute 1.9 -1.4 14.9 HANG SENG INDEX 8.8 12.6 24.5 Source: Deutsche Bank We initiate coverage on KWG with a Buy rating and HKD7.49 target price (35% potential upside). We believe KWG’s quality landbank (>80% GAV from T1/T2 cities) will support 27%/20% attributable contracted sales growth in 2017-18. Coupled with its fast ramp-up in rental income (33% CAGR), we expect it to deliver a 15% earnings CAGR in FY17-19, while maintaining the gross margin high above the sector average at 33-35%. Also, KWG trades at only 4.0x FY18F P/E, 0.6x FY17F P/B and a 59% discount to NAV, which is much cheaper than the sector average of 7.3x P/E, 1.4x P/B and 36% discount to NAV, as well as a 7-10% dividend yield in the next three years. Quality landbank to fuel double-digit sales growth KWG is continuing its aggressive land acquisitions and acquired an attributable 810k sqm in 1H17. We believe its quality landbank (RMB170bn attributable saleable resources with >80% GAV from T1/T2 cities, and with an average land cost of RMB4.5k/sqm, excluding HK) can support 27% sales growth to RMB28.4bn this year, and can boost a further 20% growth to RMB34.0bn in 2018, even without further landbanking. Sustainable high gross margin and fast rental income ramp-up support mid-teen earnings CAGR Given its lower interest cost (6.0% in 2016 vs. 7.4% in 2015) and good cost control, we believe its gross margins will remain high at 33-35% (vs. sector average of 28-29%) in the next three years despite its aggressive landbanking since 2H16. Coupled with its fast rental ramp-up (33% CAGR in the next three years), we expect KWG to deliver 12%/19% earnings growth to RMB3.3bn and RMB3.9bn in FY17-18. Manageable gearing, 7-10% dividend yield We expect the company’s net gearing to increase to ~75% in FY17 (vs. 67% last year), given its aggressive land acquisitions (it spent RMB9.4bn in 1H17). We believe this level is manageable, and should be significantly improved if there are more en-bloc office sales. With a 35% payout ratio on core profits, we expect it to offer 7-10% dividend yield in the next three years. Valuation and risks We base our HKD7.49 target price on a 45% discount to end-FY17F DCF-based NAV of HKD13.62. The stock now trades at 4.0x FY18F P/E and a 59% discount to NAV. Key risks: weaker sales due to more policy/credit tightening, and faster margin squeeze due to high land cost. (See p. 3 for details.) Distributed on: 07/08/2017 16:22:03 GMT0bed7b6cf11c 8 August 2017 Property KWG Page 2 Deutsche Bank AG/Hong Kong Model updated:07 August 2017 Running the numbers Asia China Property KWG Reuters: 1813.HK Bloomberg: 1813 HK Buy Price (7 Aug 17) HKD 5.48 Target Price HKD 7.49 52 Week range HKD 4.23 - 6.34 Market Cap (m) HKDm 17,290 USDm 2,211 Company Profile KWG Property principally engaged in property development, property investment and property management after its inception in 1995. Its property development ranges from luxurious residential and serviced a