China Property Investment Update : For Agile, life’s a beach

Tourism-related property in China is picking up. Landcosts in China’s tier-3 cities are likely to remain cheap in2H13F and possibly for years to come ensuring decentprofit margins in regions with well-thought-out urbanplanning and tourist hot spots. Per capita income in China isset to double from now till 2020, driving up demand forsecond homes, especially those located away from thepollution endemic to China’s large urban centers. Thusprojects like Agile Property’s (3383 HK, Neutral) ClearwaterBay in Sanya are likely to enjoy years of growing demand.

Country Garden (2007 HK, Outperform) and ShimaoProperty (813 HK, Outperform) are two other players activein China’s promising tourism property industry.

We took part in a 3-day trip to Guangdong and Hainan withAgile Property who showed us all of the company’sbest-selling projects, which offer both high-end units andproperty built specifically for inelastic home demand. Wefound good sell-through rates for new launches in 2Q13 andASPs that were higher than they were at the beginning ofthe year (up 15-20%). The surge of new supply coming onto the market in 3Q13 is likely to prompt Agile to acceleratesales. In the case of its flagship Hainan Clearwater Bayproject, we expect a higher full-year sales target ofRMB8.0b, up from the current target of RMB6.0b. RMB4.8bhad been contracted by end-June (80%).

Hainan project remains key. Agile’s massive ClearwaterBay project in Lingshui is not subject to housing purchaselimits. As such, it provides a degree of defensiveness whenit comes to delivering scheduled sales and earnings. Alltold, Agile is going to launch 10 new projects and 29 newphases in 2H13F, including the top-tier Changzhou project.

Agile has a land purchase budget of RMB13.0b, withRMB6b already put towards 13 parcels of land in 1H13.

Average land costs stand at RMB1,374 psm, accounting foronly 13.7% of 1H13 contracted ASP.

Action. By the end of June, Agile had only achieved 38.4%of its full-year contracted sales target compared with thesector average of 52.2%. By this measure, Agile is a saleslaggard. However, we expect it to enjoy a short-term rallyahead of a spate of new launches in 3Q-4Q13F. The stock iscurrently trading at 4.2x FY13 P/E, a 46.7% discount to NAV(HK$15.20). It finds support at 4.0x P/E, translating to an entryprice level of HK$7.80. Risks: Judging by the events of4Q12, any delay in the launches of new projects or newphases of existing projects would be detrimental to short-termstock prices and could shake market confidence.