Lower valuation on the back of parent-related liquidity issues
- CIFI ES’s share price is down 49% since its parent published 1H22 results in late-Aug, due to actions and news related to its parent.
- CIFI ES’s valuation, which used to be comparable to that of state-owned players, has inevitably been hurt due to potential liquidity issues for its parent.
- Reiterate Add with a lower TP of HK$4.00 (8.4x FY22F P/E), as we assume that CIFI ES’s collection of receivables from its parent remains normal.
Share price down 49% since parent released 1H22 results
CIFI ES’s share price is down 49% since its parent CIFI (884 HK, Add, CP HK$0.72) released its 1H22 results on 30 Aug; we believe this was due to i) CIFI’s top-up placement of 304.9m shares at a 12% discount on 31 Aug; ii) Sina News reported last week about a demand from an equity investment trust for repayment of the trust’s investment in CIFI’s property development project in Tianjin; and iii) a report in Chinese media company Hexun, quoting an internal letter from CIFI’s chairman, which said CIFI’s cash balance of over Rmb30bn on its balance sheet as at end-Jun 22 is unable to meet its liquidity needs (as banks impose strict requirements on fund withdrawal from escrow accounts).
Valuation hurt due to potential liquidity issues for parent
While CIFI ES’s property management portfolio is not heavily reliant on its parent (only 19% of contracted GFA from CIFI’s projects at end-Jun 22), we believe that as market has become more risk-averse than before due to rapidly rising interest rates, CIFI ES’s share price declines are likely due to market concerns over the potential worsening of CIFI’s liquidity. CIFI ES’s valuation, which used to trade at a one-year forward P/E close to that of its state-owned peers (e.g. COPL and Poly PS) before CIFI’s liquidity issues emerged, has inevitably been hurt.
Reiterate Add with a lower P/E multiple
While we make no changes to our FY22-24F EPS forecasts, as we believe a substantial increase in impairment provisions for CIFI ES’s receivables from CIFI is still unlikely, we trim our target PEG to 0.4x from 0.8x previously, to reflect our lower valuation for it due to the recent de-rating. Our new target FY22F P/E hence falls to 8.4x (16.9x previously) With a new HK$/Rmb exchange rate assumption of 0.93, our TP for CIFI ES falls to HK$4.00. We reiterate Add on CIFI ES but remove it from our high conviction list as we believe news around CIFI’s liquidity so far should have little impact on its earnings. Rerating catalysts include an improvement in CIFI’s liquidity and faster-than-expected growth in community value-added services (VAS). Key downside risks include more incidents of third parties seeking early repayment of their investments in CIFI’s property projects, and a substantial increase in impairment provisions for CIFI’s receivables, which could lead to lower EPS for CIFI ES.