Pick for policy turnaround
Investment Thesis
Concerns on stake disposal from Sunac China (1918 HK) may have been overplayed. Share price of Sunac Services took a severe hit along with Sunac China upon concerns that the liquidity struggle of the latter may lead to further disposals of its stake in the company. We are more optimistic than the market
on this front. Sunac has actively monetised its assets and recouped >US$4bn of cash over the past quarter for its nearterm bond repayments. This, along with Sunac Service’s currently distressed valuation and share price, points to manageable risk on further share disposals in our view.
Solid fundamentals despite potential scale contraction of developer parent. We have cut our FY21-23F earnings estimates by 5-15% (c.7-17% below market) to reflect Sunac China’s likely slowdown in presales (our estimates factored in 15% and 5% decline in its FY22 and FY23 presales) and project delivery given
that it has suspended land acquisitions and construction activities to preserve its cashflows. That said, this will still translate into a solid 3-year earnings CAGR of 55%. Despite likely weaker contribution from its parent, we believe its growth prospects can be supplemented by its robust progress in the 3rd party space (c.40% of its incremental contracted GFA came from public auctions, c.30% from M&A and 30% from parent in 2021). Therefore, we believe Sunac Services’ solid growth prospects has been overshadowed by spillover concerns on Sunac China.
Valuation:
Our new TP is based on 26.0x FY22F EPS, which is on par to the company’s average 1-year forward PE in 4Q21.
Where we differ:
The pick for sentiment and valuation recovery in the China Property Sector. Sunac Services has the highest share price correlation to its related developer within the sector since 2H21. Accordingly, we believe the counter will likely see one of the strongest rebounds in price and valuation when sentiment on
the property sector settles and recovers.
Key Risks to Our View:
Further share disposal by major shareholder; unexpected policy tightening on the property sector; significant deterioration in Sunac China’s development scale; share placement.