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CMB International Global Markets | Equity Research | Company Update PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE MORE REPORTS FROM BLOOMBERG: CMBR OR .hk China Property Sector Jeffrey Zeng (852) 3916 3727 .hk Xiao Xiao (852) 3761 8952 .hk Zhang Miao (852) 3761 8910 .hk Stock Data Mkt Cap (HK$ mn) 8,245 Avg 3 mths t/o (HK$ mn) 65.58 52w High/Low (HK$) 12.07/ 2.21 Total Issued Shares (mn) 3,184 Source: Bloomberg Shareholding Structure Kong Jian Min 62.74% Free float 37.26% Source: HKEx Share Performance Absolute Relative 1-mth -20.6% -14.8% 3-mth -42.2% -29.5% 6-mth -62.8% -51.5% 12-mth -79.3% -69.9% Source: Bloomberg 12-mth Price Performance Source: Bloomberg Auditor: Ernest & Young 01020Apr-2 1 J u l-21 O c t-2 1 J a n-2 2 Apr-2 218 13 HK HS I (re ba s ed )(H K$)BUY (Maintain) Target Price HK$3.22 (Previous TP HK$17.87) Up/downside +24.3% Current Price HK$2.59 1 29 Apr 2022 KWG is currently trading at 0.2x PB which has somehow priced in all the negatives: delay in audited report due to discrepancy of RMB22bn on non-restricted cash, -39% YoY decline in 2021 core earnings, 10% YoY decrease in 2022E sales target and mounting debts in 2022E. Now the hope is whether they can get additional HKD3-4.5bn financing from its Ap Lei Chau project, which can at least get closer to repay its USD900mn bond due in Sep. This may also depend on HK property market and banks liquidity which are affected by US rate hike and challenging China economy. Softer guidance and weaker margins. KWG only achieved RMB104bn pre-sales for 2021, missing its annual sales target by 16%. Due to tough market, management has guided softer for 2022 with target sales of RMB90-95bn (-8/-13% YoY) depending on the sell though rate (targeting 55-60%) on its RMB160bn sellable resource. It has 15% sellable resouces exposure to Yangtze River delta which is impacted by the COVID so there could be more downside. GPM decreased 10.3ppts to 21.2% in 2021 from 31.5% in 2020. This decrease was in line with market trend together with RMB800mn impairment (if added back, GPM at 25%) and sale of parking spaces with low GPM at 7-8%, fragging down overall GPM. GPM guidance for 2022 is 25-30%, but may be difficult to see much upside given still tough market. Debt pressure piled in 2022. KWG stayed within the Yellow category with liability to Asset (excluding presales) at 74.3% (75.1% in FY20), net gearing at 79.2% (61.7% in FY20) and cash to short-term debt at 1.4x (1.6x in FY20). Cash was down 34% YoY to RMB29bn (RMB46bn in 2020) causing net gearing and coverage ratio to deteriorate. The Company has RMB20.3bn due within 2022 (US$900mn due September 2022) and has already repaid RMB6.2bn by April. Management thinks their top priority is to repay all debts due this year: RMB1.7bn CMBS in July and USD900mn debt in Sep. Eyes on Ap Lei Chau financing to repay USD900mn debt: Together with Logan, the Company has 295 units (on average 2300sqf per unit and HKD50k/sqf) in Ap Lei Chau project worth HK$30bn+ sellable resources under current market condition. It has been financed at 30% LTV and company hopes to add 20-30% financing to get 50-60% LTV. If successful, it will be able to release HK$3-4.5bn (50/50% split with Logan). However, this would not be able to fully cover its US$900mn (HK$7bn) offshore bond due September. So extra help may be needed from onshore such as disposal of office buildings. Land acquisition update: The Company cut back on land acquisitions in 2021, only acquiring 6 plots (-71% YoY) with RMB5.6bn (-76% YoY). Its new acquisition attributable ratio and consolidation also went down to 72%/75% from 82%/93% in 2020. As of Apr2022, they have not bought any plots. Valuation. The Company is currently trading at 0.2x 2021 PB, which is already at a distress level for the mounting debt pressure. We remain BUY rating as there is still hope to get financing from Ap Lei Chau project. However, to reflect current market, we used 0.25x 2022E PB and derived a new TP at HK$3.22 per share. KWG (1813 HK) How to repay US$900mn debt due in Sep? 29 Apr 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2 Earnings Summary (YE 31 Dec) FY19A FY20A FY21A FY22E FY23E Revenue (RMB mn) 23,942 29,742 23,845 41,102 43,733 YoY growth (%) 24.2 -19.8 72.4 6.4 Core income (RMB mn) 9,806 6,677 3,979 5,541 5,528 EPS (RMB) 3.09 2.10 0.76 1.74 1.74 YoY growth (%) -32.0 -63.8 129.5 -0.3 Consensus EPS (RMB) N.A. N.A. N.A. 1.83 1.93 P/E (x) 0.7 1.0 2.8 1.2 1.2 P/B (x) 0.2 0.2 0.2 0.2 0.1 Yield (%) 26.1 34.4 43.3 17.2 55.8 ROE (%) 14.0 27.4 15.3 5.5 11.2 Net gearing (%) 66.4 75.4 61.7 79.2 60.4 Source: Company data, Bloomberg, CMBIGM estimates 29 Apr 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 3 Figure 1: 2021 results Source: Company data, CMBIGM The Company recorded core profit RMB4bn (-39% YoY), below our 2021E estimate of RMB8bn by 50%. Proportionate revenue (including JV & Associates) decreased 5% to RMB44bn. Attributable GP margin eroded to 23.3% (-7.6ppts YoY) due to higher sales commission which drove up operating leverage (SG&A/revenue ratio from 9% in 2020 to 15% in 2021), and NPM eroded 12.3ppts in 2021 to 9.0%. EPS was RMB0.76/share (-64% YoY) and the Company decided not to declare a final dividend this year. Interim dividend was RMB 0.37/share (48.7% payout ratio, +4.4ppts YoY). Figure 2: KWG Valuation Source: BBG Figure 3: Comps table 29 Apr 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 4 Source: CMBIGM 29 Apr 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 5 Figure 4: Ap Lei Chau project Source: CMBIGM 29 Apr 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 6 Financial Summary Income statement Cash flow summary YE 31 Dec (RMB mn) FY19A FY20A FY21A FY22E FY23E YE 31 Dec (RMB mn) FY19A FY20A FY21A FY22E FY23E Revenue 23,942 29,742 23,845 41,102 43,733 EBIT 7,738 8,201 2,780 7,056 6,747 Property sales 22,762 28,487 22,192 39,483 42,000 D&A 263 292 NA 428 449 Rental 627 801 957 910 983 Change in working capital (845) (7,056) NA (1,000) (1,692) Hotel 553 454 696 709 750 Income tax paid (1,172) (1,610) NA (3,172) (3,040) Property management 0 0 0 0 0 Others (2,943) 1,304 NA 3,746 3,747 Cost of sales (16,496) (20,383) (18,799) (31,307) (34,146) Net cash from operating 3,042 1,131 2,780 7,058 6,210 Gross profit 7,446 9,359 5,046 9,794 9,587 Capex (2,588) (3,374) NA (2,100) (1,967) Other income and gains 2,854 1,628 1,788 1,951 2,101 Associates/JV (9,012) (370) NA (3,000) (4,000) Distribution expenses (1,006) (1,222) (1,808) (1,808) (1,881) Other 0 0 NA 0 0 Administrative expenses (1,551) (1,561) (1,839) (2,877) (3,061) Net cash from investing (11,601) (3,745) NA (5,100) (5,967) Other expenses (4) (3) (405) (4) 0 Operating profit 7,738 8,201 2,780 7,056 6,747 Equity raised 0 0 NA 0 1 Change of Debts 8,774 (11,986) NA (254) (1,897) Finance expenses (1,531) (1,034) (303) (1,068) (1,053) Dividend paid (1,767) (2,539) NA (3,272) (3,813) Associates/JV 3,445 2,481 2,266 3,150 3,300 Other 279 6,716 NA 0 1 Exceptional 3,716 415 (662) 0 0 Net cash from financing 7,286 (7,809) NA (3,526) (5,708) Pre-tax profit 13,368 10,063 4,081 9,138 8,993 Net change in cash (1,272) (10,423) (11,188) (1,568) (5,465) Profits tax (3,497) (3,398) (1,518) (3,172) (3,040) Cash at the beginning 52,578 51,378 40,636 38,130 36,562 Minority interest (250) (225) (142) (425) (425) Exchange difference 73 (319) 0 0 0 Perpetual 0 0 0 0 0 Cash at the end 51,378 40,636 29,447 36,562 31,098 Net profit 9,621 6,440 2,421 5,541 5,528 Pledged deposit 5,356 5,834 5,834 5,834 5,833 Core profit 9,806 6,677 3,979 5,541 5,528 Cash at BS 56,734 46,470 29,447 42,396 36,931 Balance sheet Key ratios YE 31 Dec (RMB mn) FY19A FY20A FY21A FY22E FY23E YE 31 Dec FY19A FY20A FY21A FY22E FY22E Non-current assets 84,578 94,396 108,538 104,759 110,434 Sales mix (%) Fixed asset 6,411 7,780 9,173 8,200 8,250 Property sales 95.1 95.8 93.1 96.1 96.0 Investment properties 27,263 29,321 29,954 33,500 35,000 Rental 2.6 2.7 4.0 2.2 2.2 Associates/JV 47,667 52,211 62,263 56,000 60,000 Hotel 2.3 1.5 2.9 1.7 1.7 Intangible assets 0 0 0 0 1 Property management 0.0 0.0 0.0 0.0 0.0 Other non-current assets 3,237 5,085 7,148 7,059 7,183 Total 100.0 100.0 100.0 100.0 100.0 Current assets 129,745 137,802 123,711 131,941 129,976 Profit & loss ratios (%) Cash 56,734 44,580 29,447 36,562 31,098 Gross margin 31.1 31.5 21.2 23.8 21.9 Account receivable 9,568 11,729 16,997 12,500 13,000 Pre-tax margin 32.3 27.6 11.7 17.2 15.4 Inventories 62,690 80,614 76,181 82,000 85,000 Net margin 41.0 22.4 10.2 13.5 12.6 Other current assets 753 878 1,085 878 878 Effective tax rate 26.2 33.8 37.2 34.7 33.8 Current liabilities 109,672 121,114 112,166 117,595 118,867 Balance sheet ratios Borrowings 23,728 25,255 20,334 19,896 18,000 Current ratio (x) 1.2 1.1 1.1 1.1 1.1 Trade and other payables 9,072 13,166 13,348 14,500 16,308 Receivable day 145.9 143.9 260.2 111.0 108.5 Contract liabilities 27,627 31,746 39,925 31,746 31,798 Payable day 138.3 161.6 204.3 128.8 136.1 Deferred taxation 9,926 12,285 13,067 13,000 13,000 Inventory day 1387.1 1443.5 1479.1 956.0 908.6 Other current liabilities 39,318 38,662 25,493 38,453 39,761 Net gearing ratio (%) 75.4 61.7 79.2 60.4 64.2 Non-current liabilities 66,408 57,168 60,381 58,097 58,527 Returns (%) Borrowings 61,850 52,605 56,385 53,527 53,527 ROE 27.4 15.3 5.5 11.2 10.8 Other non-current liabilities 4,559 4,563 3,996 4,569 5,000 ROA 25.6 12.4 4.1 9.1 8.8 Shareholders equity 35,795 43,535 44,321 49,299 51,013 Per share data Minority interest 2,448 10,382 15,381 11,709 12,000 EPS (RMB) 3.09 2.10 0.76 1.74 1.74 Perpetual bond 0 0 0 0 0 DPS (RMB) 0.74 0.93 0.37 1.20 1.20 Total equity 38,243 53,917 59,702 61,008 63,013 BVPS (RMB) 11.27 13.69 13.93 15.52 16.05 Source: Company data, CMBIS estimates 29 Apr 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 7 Disclosures & Disclaimers Analyst Certification The research analyst who is primary responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report. CMBIGM or its affiliate(s) have investment banking relationship with the issuers covered in this report in preceding 12 months. CMBIGM Ratings BUY : Stock with potential return of over 15% over next 12 months HOLD : Stock with potential return of +15% to -10% over next 12 months SELL : Stock with potential loss of over 10% over next 12 months NOT RATED : Stock is not rated by CMBIGM OUTPERFORM : Industry expected to outperform the relevant broad market benchmark over next 12 months MARKET-PERFORM : Industry expected to perform in-line with the relevant broad market benchmark over next 12 months UNDERPERFORM : Industry expected to underperform the relevant broad market benchmark over next 12 months CMB International Securities Limited Address: 45/F, Champion Tower, 3 Garden Road, Hong Kong, Tel: (852) 3900 0888 Fax: (852) 3900 0800 CMB International Securities Limited (“CMBIGM”) is a wholly owned subsidiary of CMB International Capital Corporation Limited (a wholly owned subsidiary of China Merchants Bank) Important Disclosures There are risks involved in transacting in any securities. 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