TAGEN GROUP(000090)INITIATION：POLICY CREATES OPPORTUNITIES EXPERIENCE HELPS DEVELOPM

　　We believe that the urban village renovation (UVR) initiative brings important development opportunities to local state-owned enterprises (SOEs) with urban renewal experience in super-large cities and megacities, especially the three top-tier cities of Beijing, Shanghai and Shenzhen.Tagen Group not only has high-quality project reserves, but also has in-depth urban renewal experience in Shenzhen. Therefore, the Company will likely continue to benefit from the current round of UVR policies and achieve sustainable and stable development.
　　A service provider focusing on the whole value chain of the construction, development, operation in core cities.
　　Tagen Group is the only listed platform under the Shenzhen Special Economic Zone Construction & Development Group. It has been deeply engaged in Shenzhen’s urban development for a long time, promoting the SOE reform and unleashing its management vitality proactively.
　　The UVR in super-large and mega cities fuels development headroom for the real estate value chain.
　　We conservatively estimate that this round of UVR can bring an incremental of Rmb1.9trn in annualized commodity housing saleable resources and Rmb800bn in annualized average rental income in a ten-year timeframe, and key first-tier cities like Shenzhen will become the focus in this round of UVR.
　　And the UVR is not only beneficial for addressing hidden challenges in social governance but also for stabilizing the economic fundamentals. We believe that it will create new development opportunities in the real estate value chain.
　　Focusing on key core cities and building presence along the whole value chain.
　　The Company with business of planning and design, construction, development and operation and maintenance services, is a local enterprise focusing on the whole industry value chain of urban construction. In the field of construction, relying on the advantages of technological R&D and the robust demand in the region, the Company has achieved sustained rapid growth in business revenue, and the revenue of this sector in 2021/22/1H23 increased by 19%/25%/35% YoY, respectively. In the field of real estate development, the Company achieved sales revenue of Rmb6.8bn in 1H23, up 54.6% YoY.
　　Its unsettled project development stage is arranged in an orderly manner, with resources obtained by diversified means and controllable costs, among which, many projects are located in Shenzhen, with sound location and profitability.
　　These projects are likely to steadily contribute revenue and profit in the next few years.
　　Leveraging the rich experience in urban renewal, the Company is likely to seize the opportunity brought by UVR.
　　The Company has been actively engaged in Shenzhen’s urban renewal, including shantytown redevelopment and renovation of old urban residential communities, and the core competencies required for the UVR are highly consistent with the various types of urban renewal work. The Company’s Tianjiao project is its flagship example in renovation of old urban residential communities, contributing significant profits over the past three years. The complicated shantytown redevelopment project of Erxian Chahuadi in Luohu district witnessed progress, and by 2023, the Company has successfully completed the main tasks related to relocation and resettlement. The Nanling Village project covers an expansive area of up to 2.5mn sqm, and the Company secured the bid to serve as the pre-development service provider for land consolidation and coordinated interests. With the wealth of experience gained from Shenzhen's urban renewal endeavors and the emerging opportunities driven by the accelerated UVR in the future, we believe that the Company might encounter more distinct development prospects.
　　Sound credit and stable leverage.
　　The Company's financing cost is reasonable, with bank loan costs ranging from 2.4% to 5.88% and bond financing costs ranging from 2.46% to 4.15% as of 1H23. Under the background of the credit turmoil in the industry, Tagen has maintained smooth financing channels with the background of SOE shareholders and high-quality resource reserves, which will help it to actively participate in the UVR business in the future.
　　Potential risks: Increased competition in the construction market may affect the Company's profitability; The heightened competition in the urban land market where the Company operates might result in challenges to secure a sufficient amount of land reserves through public channels; Real estate development could experience certain fluctuations; The sales fundamentals of the real estate market remain weak, and if policy support is not introduced as anticipated in terms of timing and scope, both industry fundamentals and credit conditions could deteriorate further; Uncertainties exist in expanding the Company's urban service business externally and exploring new ventures; Leased property assets could be influenced by increased market supply, leading to potential fluctuations in rental income and occupancy rates; The specific policies regarding urban village transformation are yet to be clearly defined, and the complexity and scale of the transformation remain unknown; The Company’s involvement in the transformation might not meet the expected scale and momentum due to these uncertainties.
　　Investment strategy: We believe that the UVR initiative brings important development opportunities to local SOEs with urban renewal experience in super-large cities and megacities, especially the three top-tier cities of Beijing, Shanghai and Shenzhen. Tagen Group not only has high-quality project reserves, but also has in-depth urban renewal experience in Shenzhen. Therefore, the Company will likely continue to benefit from the current round of UVR policies and achieve sustainable and stable development. We forecast the Company’s 2023E/24E/25E EPS to be Rmb1.11/1.15/1.29. Based on the valuation of 6x-16x 2023E PE and 0.6x-1.3x 2023E PB of high-quality real estate SOEs and some companies participating in urban renewal projects, including Yuexiu Property (00123.HK), Huafa Properties (600325.SH), C&D International (01908.HK), Beijing Urban Construction Investment & Development (600266.SH) (the first three companies adopting our estimates, and the last one adopting Wind consensus estimates), we assign 8x 2023E PE and 1x 2023E PB to derive target price of Rmb8.5, and the Company's current dividend yield is 5.0%, presenting an attractive entry point. We initiate coverage with a “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。