HUAFA PROPERTIES(600325)COMMENTARY：EARNINGS-ACCRETIVE ACQUISITION AND FURTHER PROGRESS IN EQUITY FINANCING

　　Huafa announced its plan to acquire 51% equity of the comprehensive culture & tourism project （in a core location of Shenzhen） of Sunac at a total cost of Rmb9.94bn （incl. land price to be paid）。 After the transaction is completed, the Company will hold 100% equity of the project. We believe that this transaction could significantly mitigate the credit risk faced by the industry and promote the delivery of the project. It will also help Huafa hold more high-quality core assets, transform towards a new development model and share more interests with its shareholders. Huafa also disclosed that its equity refinancing application has been accepted by the China Securities Regulatory Commission （CSRC）， which reckons that the application documents submitted by the Company are complete.
　　 Event: On Jan 4, Huafa announced its plan to acquire 51% equity of Shenzhen Ronghua Land Investment Co., Ltd. （the “project company”） owned by Shenzhen Sunac Culture & Tourism Industry Development Group Co., Ltd. at a total transaction cost of Rmb9.94bn-including the expense of purchasing the target’s equity and creditor’s rights and the shareholder loan offered to the project company for land payment. The main asset held by the project company is Sunac Huafa Ice and Snow Culture & Tourism City Project （the “target project”） located in the core location of Shenzhen. After the transaction is completed, Huafa will hold 100% equity of the project company. The asset to be acquired is likely to strongly support Huafa’s medium- and long-term earnings.
　　The target project is located in the core location of Bao’an District, Shenzhen, covering a total area of 436,800 sqm and total floor space of 1,310,700 sqm.
　　Indoor ice and snow infrastructure features a high construction threshold, all-weather and all-season operations, and a low participation threshold. It is a high-quality core real estate asset with a high operating threshold. Given that Sunac Guangzhou Ice and Snow Project has been operating well and Sunac will still participate in some operations of the target project, we believe that the target project will generate rich long-term returns for Huafa and help it accumulate experience in operating ice and snow projects. The transition of the real estate sector to a new development mode is to gradually bid farewell to the simple development model that features fast turnover, and hold and operate high-quality real estate assets in core cities. Huafa has taken a solid step in this regard.
The reasonable transaction structure not only helps undertake industry responsibility but also generates economic benefits.
　　With Sunac China facing a shortage of funds, Huafa’s acquisition of the target project could not only ensure the project to be delivered as soon as possible, but also alleviate the credit crisis faced by the firm to a certain extent. Huafa has retained part of the equity transfer fund to be offset by unsold property within three years after the registration is completed, thus easing the financial pressure faced by itself in the current accounting period. The Company has reserved the right to repurchase the project for Sunac Culture & Tourism. We believe that if Sunac Culture & Tourism exercises the repurchase right, this　　will prove that the project enjoys a bright prospect, thus protecting the remaining equity value of Huafa to the greatest extent. More importantly, it is beneficial for the growth of the long-term value of the Company’s assets to give full consideration to the interests of its partner with the ability to operate the high-quality asset with an extremely high operating threshold. Moreover, the main part of the asset is not ice and snow amusement facilities, but saleable talent housing （300,000 sqm）， office space （740,000 sqm） and commercial property （100,000 sqm）。 With the endorsement of a state-owned enterprise brand, the Company can collect sales receivables as soon as possible, thus avoiding long-term cash-flow problems.
With the refinancing application accepted, we expect equity financing to help optimize the balance sheet of Huafa.
　　After examining the documents submitted by the Company for administrative approval of private placement of shares, the CSRC reckons that the application documents are complete, and decides to accept its application for administrative approval. Leading the industry in having refinancing application accepted means that the Company may go further in optimizing its balance sheet.
Potential risks: It is costly to acquire the target project, and it will take time for the project to collect sales receivables. Meanwhile, there is uncertainty in the future project operation. The Company’s refinancing plan is subject to approval by the CSRC, and there is still uncertainty about whether it can be approved.
Earnings forecast, valuation and rating: In 2022, Huafa turned a large amount of land banks that it newly acquired in core cities into saleable resources. We believe this will enable the Company to continue to outperform peers in terms of sales performance in the foreseeable future. The Company’s acquisition of the target project has not only mitigated industry risks, but also increased its own core assets. We maintain our 2022E/23E/24E EPS forecasts of Rmb1.65/1.81/1.82 for the Company. With reference to the 7x-9x 2022 PE （CITICS Research forecast） for comparable developers with high credit ratings such as China Vanke （000002.SZ） and Xiamen C&D （600153.SH）， and given the potential earnings growth brought by the Company’s high-quality land banks, we apply 10x 2022E PE to arrive at a target price of Rmb16.5 and reiterate the “BUY” rating.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。