Beijing Capital Development Co. Inline with expectations: attractive valuation; high earnings visibility

BCD reported underlying 1H11 net profit of Rmb307mn, down 65% yoy, inline with its profit warning on July 9. The earnings drop was driven by the 97%yoy drop in one-off land sales (1H10 land sales: Rmb2.1bn) as well as bookingseasonality. Key highlights: 1) We estimate 100%/40% of our 2011-12Erevenues have been locked in and BCD has achieved Rmb8.4bn (Rmb6.4bn,excl. associates) presales YTD, on track to our 2011E forecast of Rmb15.8bn,up 21% yoy. We estimate Rmb15bn+ resources available for sale in 2H11, anda 55% sell-through ratio is needed to achieve our target. We believe BCD hasthe pricing flexibility given its low-land cost advantage. 2) We believe thepending launch of the Rmb5bn corporate bond for social housing, likely byyear-end, will allow BCD to broaden its financing channel; 3) Net gearingincreased to 118% from 77% (as of 2010) due to aggressive scale expansion,e.g. GFA under construction was up 161% yoy and Rmb5.6bn in landacquisition YTD. While the net gearing may limit its further expansionpotential, we think any liquidity risks should be limited given its SOEbackground.

What to do with the stock。

We retain our Buy (on CL) and fine-tuned 2011-13E EPS by -5%/-3%/+4%following projects updates. We believe the market has underestimatedBCD’s potential to transform from a regional into a nationwide player. Our12m target price of Rmb18.46 (unchanged) is set at a 40% disc. to end-2011ENAV. The stock is trading at a 62% discount to 2011E NAV, 9X 2011E P/E, vs.

A-share peers’ 52% discount and 11X. Risks: worse than expected presalesdriven by prolonged tightening; macro hard landing.