金隅集团(601992)

BBMG reported a recurring net profit of RMB875m in Q3 2018, up 38% YoY. During a conferencecall yesterday, management confirmed that revenue booking for the property development businesswas limited in Q3, but that the Company maintains its guidance of stronger revenue booking in Q4.Therefore, we still feel comfortable with our Q4 2018E recurring net profit of RMB1.17bn. Our earnings forecasts remain largely unchanged, but we lower our SOTP-based target price from HK$3.70to HK$3.08 (0.5x 2018E PBR and 7x 2018E PER) after using a deeper NAV discount for the property development business (from 40% to 50%) to reflect the de-rating of the China property sector. Wemaintain our BUY rating. We believe the implied PBR of 0.5x based on our target price is not aggressive on the back of 7.5% ROE. We also lower our target price for BBMG-A (601992.CH) fromRMB4.80 to RMB4.01 accordingly (50% premium to our H-share target price, methodology unchanged). In the near term, the major share price catalyst will be news flow on any moderate relaxation of policies related to the property sector.

Investment Highlights

On track to reach the full-year revenue booking target. In 9M2018, BBMG recorded revenue of RMB12.9bn for the property development business. This may raise the concern aboutwhether the Company can achieve its full-year revenue booking guidance of not less thanRMB21.4bn. Management said the Company is still on track to reach this target. Based on therevenue booking pattern in the past few years, we agree that Q3 is usually a low season, andthe Company has a track record of booking sizable revenue in Q4 in some years. BBMG maintains its full-year gross margin guidance for this segment of 31% (vs. 35% in 9M2018), whichsuggests some lower-margin projects will be booked in Q4.

Cement business remained strong. In Q3 2018, the Company reported a blended ASP(cement and clinker) of RMB287/tonne, up from RMB242/tonne in Q3 2017. According to theCompany, the ASP in October increased moderately to RMB291/tonne. Gross profit per tonneimproved significantly from RMB74 in Q3 2017 to RMB103 in Q3 2018. Sales volume of cement and clinker dropped 1.3% YoY in Q3 to 33.5m tonnes. Meanwhile, north China will enterthe low season in November, so we don’t expect to see an upside surprise for this segment inQ4 2018.

Challenging to meet the full-year sales target for the property business. BBMG set a presale target of RMB27bn for 2018, but it achieved less than 50% of this target in 9M2018 due tothe unfavourable market environment and stringent government policies. We don’t rule out thepossibility that the Company will fail to meet its target, but it should not have much impact onour financial model at the moment, as we have not projected high growth for the property development business in 2019E.

Overly bearish valuation as an SOE. The Company is trading at 4.8x 2018E PER and 0.34x2018E PBR. We believe the very low valuation does not reflect the Company’s advantage insecuring financing thanks to its SOE status. In mid October, BBMG issued a three-year medium-term note of RMB1.5bn at an interest rate of 5.25%. In comparison, according to pressreports, China Evergrande (3333.HK) is planning to issue a two-year US dollar bond at aninterest rate of 11%.