What's changedWe raise our 12-m NAV-based Sunac TP to HK$7.30 from HK$5.25 to reflect:(1) +13% NAV upgrade after factoring in the Legend acquisition (42 projects),20% stake investment in Jinke (000656.SZ; Not Covered) and stronger-thanexpectedpresales in 11M16 (100% of previous FY16 GHe); (2) a 10ppnarrower TP discount to NAV (from 55% to 45%) to our new end-16E NAVon the back of its improving ROE trend (avg. 2017E-18E underlying ROE of14.4% vs. peer avg. of 13%) after the dip in 2016E (4.7% vs. peers 12.6%).
However, considering the near term negative impact from substantiallyincreased expenses related to all the M&A activities and financing costdue to rising leverage, we cut 2016E/17E underlying EPS by 49%/29% butraise 2018E by 10% on sales upgrade. Our 12-m TP implies 9% potentialupside on Dec 14 closing vs. avg. 14% for offshore coverage, retain Neutral.
ImplicationsWe remain positive on Sunac’s growth outlook in the long term givenmanagement’s proven track record in sales execution and land banking.
After almost tripling its portfolio to c.230 projects across 36 cities from 84projects in 11 cities at end-15, we raise our 2017E-18E presales by30%/19% to around Rmb200bn in each year (incl. c.10% contribution fromthe Legend acquisition), implying a coverage highest presales growthCAGR of 22% in 2016E-18E (vs. peers -4%) and thus paving the way formore solid earnings growth beyond 2018E. However, post the recent shareprice outperformance (+30% vs. MSCI China -4% & offshore coverage flatin the past two months), valuation multiples (such as NAV discount andP/E) are at the high-end of its historical trading range, which we believepartially prices in market expectation on its strong growth outlook.
ValuationSunac is trading at a 50% discount to end-16E NAV, 14X/1.0X avg. of 2016-18E P/E and P/B, vs. offshore avg. of 52%/6.7X/0.9X. Maintain Neutral*
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