Full-year sales target of RMB180 billion is basically achieved

The latest data showed that contract sales of Evergrande reached RMB17.85 billion in November and sales by GFA was 2.14 million sq.m., representing an increase of 33.2% and 26.6% yoy respectively. For the first 11 months, contract sales of the company already reached RMB172.4 billion, which accounted for 96% of the upwardly adjusted sales target of RMB180 billion, representing a growth of 42.8% yoy. It can be said that the company has basically reached its full-year target and may probably exceed it.

While keeping its rapid sell-through on the one hand, Evergrande also replenished its land bank quickly. In early December, Evergrande spent RMB13.5 billion to acquire 4 mega projects which are located in Haikou in Hainan, Wuhan in Hubei, Huizhou in Guangdong, from Hong Kong's New World Group. The asset quality is superior in this transaction. Moreover, the payment method is beneficial to Evergrande, which has strong operation capability. Other than the RMB3.15 billion down payment, the company can pay for the rest of transaction price within two years. Evergrande can leverage on its advantage in high turnover. By using cash flows from its property projects to pay for the rest of the transaction price, it can ensure a relatively higher investment return for the project. 

Diversification strategy is bearing fruit

In the recent half year, effects from Evergrande's diversification strategy begin to unfold. Its series of activities include: building an O2O platform, Heng Teng Internet; Evergrande Taobao Football Club; the successful listing of Evergrande Culture Industry Group on the new Third Board; restructuring of its food industry and the building of the Evergrande life insurance platform. Evergrande has successfully expanded the “Evergrande” brand to consumption, finance, sports and cultural businesses to become an integrated brand. Driving rapid growth of each platform for future spin-off has become an effective path to realize the value of Evergrande. We can expect that Evergrande will expand into more industries and increase the degree of capitalization. 

Financial structure continues to improve

On 15 October, the company announced that it successfully issued corporate bonds through a private placement, breaking the country's record of privately issued debts in terms of fund raised. There were two types of bonds in this private placement, namely “3+2” term and 5-year term, with coupon rates lower than those of off-shore bonds.  The annual coupon rate of the RMB17.5 billion “3+2”-term bond was 7.3% and that of the 5-year bond was 7.88%. The smooth execution of the issuance of onshore debt, privately placed debt and equity placement is beneficial to the optimization of the company's financial structure and costs. 

Risk

Slower sales;

Progress of business diversification is below expectations

Valuation

Strong sales of Evergrande outperformed its peers. There are still abundant sales pipelines in next year and it is believed that the growth momentum will continue. Besides, the smooth progress of its business diversification strategy and further enhancement in its degree of capitalization will enhance its enterprise value. We recommend a “Neutral” rating, with a 12-month target price of HKD6.6, which is equivalent to 2015/2016 prospective PE ratio of 8.5x and 5.7x. (Closing price as at 24, Dec 2015)

Financials

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