China/Hong Kong China Property

Minmetals Land (230 HK)

Making the right moves but doubts linger

30 March 2012
Company Rating: Neutral
(maintained)

Harvesting strong earnings growth over the past quarter. Core net profits, amortized negative goodwill included, shot up, from HK$160m to HK$714m, a meteoric 346.3% rise. Earnings per share was HK$0.18 in FY11, against HK$0.19 in FY10, translating to a 4.3% YoY decline, mainly due to the enlarged number of shares, from 2,753m to 3,338m, as a result of the 2010 share rights issue to the parent group in exchange for certain asset injections. We expect earnings growth momentum to last for the next three years, at a CAGR of 40%, based on the companys detailed completion schedule for the period. Gross profit margin fell, from 38% in FY10 to 32% in FY11, mainly due to amortization of negative goodwill of HK$251m in COGS, on top of the change in the product mix from high value villas to mid-to-low-end high-rise apartments. As the negative goodwill stays on the books for next three years, we expect a flat margin outlook in the range of 37.0% to 39.0%. Financial position under control, as net gearing stood at 36.5% in FY11, 24.6ppt more than the 11.8% in FY10, though still well below the 60% sector average. Thus investors may still avail themselves of the benefits of the extra value the company can extract from its cheap land bank acquisitions. We forecast net gearing to peak in FY12 at 47.8%, assuming the firm withdraws the HK$1.3b club loan that had been earmarked for expansion in FY12. Target contracted sales of RMB4b and salable value of RMB8b, representing a sell through rate of c.50%. As at end-March 2012, Minmetals Land has 58% of 2012 revenue locked in and 48% in GFA presold, exhibiting a decent level of earnings visibility for the near term. Action. We recommend switching to larger players with strong earnings visibility and rich salable resources at decent cash collection rates. Return to Minmetals Land only in the event catalysts materialize, such as an asset injection or a well-received launch. In the short term, volatility seen in the broad market index is sapping the markets risk appetite, leading to selling pressure on the name. Maintain Neutral rating. We raised our NAV estimate to HK$2.50 after taking account of greater number of shares and the enlarged asset base, with the target NAV discount unchanged. Our target price rises to HK$1.00, from HK$0.80, with upside potential of 11.1% from the current share price. Risk. Small market-cap players like Minmetals Land tend to be exposed to liquidity risk due to thin trading volumes.

Price: Target:
Trading data

HK$0.90 HK$1.00
(up from HK$0.80)

52-week range Market capitalization (m) Shares outstanding (m) Free float (%) Estimated FY12 NAV (HK$/share) 3M average daily T/O (m share) 3M average daily T/O (US$m) Expected return (%) 1 year Closing price on 29 March 2012

HK$0.63-1.53 HK$3,004/US$387 3,338 32.7 2.50 2.9 0.4 12.9

Minmetals Land vs. HSCEI

HK$ 1.8 1.6 1.4 1.2 1.0 0.8 0.6 Jan-11

Apr-11

Aug-11 Dec-11 Minmetals Land HSCEI (rebased)

Mar-12

Source: Bloomberg

Forecast and valuation

Year to 31 December 2009 2010 2011 714 268.0 4.2 0.5 1.00 1.1 11.0 2012F 1,000 39.7 3.0 0.4 1.64 1.8 13.4 2013F 1,294 29.4 2.3 0.3 2.12 2.4 14.9 Core net profit (HK$ m) 100 160 YoY (%) (28.1) (5.3) P/E (x) 14.7 15.5 P/B (x) 0.3 0.4 DPS (HK$) 0.00 1.21 Yield (%) 0.0 1.3 ROE (%) 2.3 2.7 Source: Company data, CCBIS estimates

Edison Bian
(86755) 8826 6503 edisonbian@ccbintl.com

Peter So
(852) 2532 6786 peterso@ccbintl.com

Please read the analyst certification and other important disclosures on last page

Minmetals Land (230 HK)

30 March 2012

Financial highlights for FY11 results

HK$m Revenue Real estate development and related services Specialized construction contracts Rental incomes Cost of sales Gross profit Other gains Selling and distribution costs Administrative expenses Revaluation gain on investment properties Operating profit Finance income Finance costs Share of results Profit before tax Tax charge Profit for the year from continuing operations Profit for the year Attributable to: Equity holders of the company Minority interests Core net profit Basic EPS (HK$ cents) DPS (HK$ cents) FY11 5,329 4,684 592 53 (3,638) 1,691 83 (148) (297) 56 1,385 80 (31) (20) 1,413 (641) 772 772 610 161 714 18.2 1.0 FY10 1,659 1,182 428 49 (1,032) 627 350 (61) (144) 37 809 14 (2) (3) 818 (210) 609 609 527 82 160 19.1 1.2 YoY (%) 221.3 296.2 38.5 7.7 252.5 169.8 (76.3) 143.0 105.9 49.2 71.1 464.0 1,566.8 595.7 72.6 205.8 26.8 26.8 15.8 97.1 346.3 (4.3) (17.4) Change (ppt) Gross profit margin Operating margin Net gearing ROE 31.7 26.0 36.5 11.0 37.8 15.7 11.8 2.7 (6.1) 10.3 24.6 8.3 YoY (%) Contracted sales achieved in GFA (sm) Contracted sales achieved in value (RMB m) Contracted sales in ASP(RMB/sm) Note: Number of shares increased to 3,338m in FY11 Source: Company data, CCBIS estimates 315,040 3,851 12,224 353,400 3,480 10,279 (10.9) 10.7 18.9

Minmetals Land (230 HK)

30 March 2012

Minmetals Land financial summary

Income statement
FYE 31 December (HK$m) Revenue Real estate development Specialized construction contracts Gross rental and management fee income Cost of sales Other gains SG&A Revaluation gains Impairment of goodwill Other income and expenses Operating profit Finance cost (net) Share of results Profit before tax Tax charge Profit for the year (continuing operations) Minority interests Attributable profit Core net profit 2009A 2010A 1,244 728 469 1,659 1,182 428 2011A 5,329 4,684 592 2012F 6,155 5,497 616 2013F 7,643 6,916 640

Balance sheet
FYE 31 December (HK$m) Property, plant and equipment Investment properties Goodwill Other non-current assets Inventories Trade and other receivables Restricted cash and pledged deposits Cash and bank deposits Other current assets Total assets Long-term borrowings Other non-current liabilities Short-term borrowings Deferred revenue Trade and other payables Other current liabilities Total liabilities Shareholders equity Minority interests Total equity Total equities and liabilities 2009A 2010A 2011A 2012F 2013F 78 86 140 162 201 937 971 1,007 1,309 1,637 11 12 10 10 10 639 842 675 743 866 2,393 5,845 7,493 10,490 11,539 324 4,409 3,560 4,272 5,126 84 113 164 164 164 2,394 3,250 2,859 3,102 3,912 4 1 1,128 11 13 6,864 15,530 17,034 20,261 23,465 602 12 719 41 698 57 2,130 4,420 315 4,734 572 220 3,493 2,599 2,163 204 9,251 5,923 356 6,279 2,459 3,197 3,517 152 175 217 2,773 3,466 3,813 1,316 1,580 1,896 2,794 3,227 4,007 289 334 415 9,784 11,979 13,865 6,504 746 7,250 7,451 831 8,281 8,675 925 9,601

47 49 53 42 87 (964) (1,032) (3,638) (3,859) (4,705) 8 350 83 0 0 (114) (205) (445) (695) (902) 39 37 56 0 0 0 0 0 0 0 0 0 0 0 0 214 809 1,385 1,600 2,036 13 12 48 11 12 0 (3) (20) 0 0 227 818 1,413 1,611 2,048 (72) (210) (641) (526) (658) 155 27 129 100 609 82 527 160 772 161 610 714 0.21 1.94 0.01 1,086 84 1,001 1,000 0.30 2.23 0.02 1,390 94 1,295 1,294 0.39 2.59 0.02

Core EPS (HK$) 0.06 0.06 BVPS (HK$) 2.70 2.14 DPS (HK$) 0.00 0.01 Note: Number of shares increased to 3,338m in FY11

6,864 15,530 17,034 20,261 23,465

Cashflow
FYE 31 December (HK$ m) Pretax profits Adj: non-cash items Interest paid Tax paid Net cash from operating Acquisition of subsidiary Purchase of PPE Interest received Net cash from Investing Change in borrowings Change in restricted cash Dividend paid Other Net cash from financing Net change in cash 2009A 2010A 2011F 2012F 2013F 227 818 1,413 1,611 2,048 (86) (2,709) (2,379) (2,131) (1,064) (71) (44) (63) (80) (88) (65) (287) (641) (526) (658) 5 (2,221) (1,670) (1,126) 238 (750) 546 (35) 0 0 (4) (8) (53) (22) (39) 13 14 16 14 16 (741) 552 (73) (7) (24) 664 2,553 1,167 1,431 666 (70) (29) (50) 0 0 0 (33) (33) (55) (71) 1,901 1 0 0 0 2,495 2,491 1,084 1,376 595 1,758 822 (659) 243 810

Key financial ratios

FYE 31 December (%) Gross margin Operating margin EBIT margin Pre-tax margin Core net profit margin SG&A/revenue Revenue growth EBIT growth Core net profit growth Core EPS growth Interest coverage (x) Current ratio Quick ratio Net gearing ratio ROE ROA 2009A 22.5 17.2 17.0 18.3 8.0 9.1 6.7 17.4 (28.1) (28.1) 3.6 3.4 1.9 Net cash 2.3 2.3 2010A 37.8 48.8 28.5 49.3 9.6 12.4 33.3 123.2 60.6 (5.3) 15.7 1.6 0.9 11.8 2.7 3.9 2011A 31.7 26.0 26.2 26.5 13.4 8.4 221.3 195.9 346.3 268.0 30.0 2.1 1.1 36.5 11.0 4.5 2012F 37.3 26.0 26.0 26.2 16.2 11.3 15.5 14.4 40.0 39.7 24.3 2.1 0.9 47.8 13.4 5.4 2013F 38.4 26.6 26.6 26.8 16.9 11.8 24.2 27.3 29.4 29.4 28.1 2.0 0.9 39.4 14.9 5.9

Source: Company data, CCBIS estimates

Minmetals Land (230 HK)

30 March 2012

Rating definitions
Outperform (O) expected return >10% over the next twelve months Neutral (N) expected return between -10% to 10% over the next twelve months Underperform (U) expected return < -10% over the next twelve months

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