China Resources Land Limited (1109.HK) Benefit from parent companys asset injection, performance outburst growth

Summary
With projects in Beijing, Shanghai, Shenzhen, Chengdu and other cities progressing smoothly, state participating large property developer China Resources Land (CRL) enjoyed a rapid development in 2007. In first half of 2007, the groups turnover and net profit respectively rose by 80.8% and 62.9% to HK$1.81 billion and HK$ 575 million. The annual turnover in 2007 is expected to reach HK $6.9 billion, with about HK$ 2.01 billion net profit. The parent company, China Resources Group, through the model of land acquisition, completion of first class land development and injection into listed company, fully guaranteed CRLs land bank. With an optimistic view on future development of CRL, we rate the group with "Buy", and target price at HK$ 18.02, representing 36% premium increase than current price.
Land bank benefited from parent companys asset injection
Parent company, China Resources Group injected cultivated land into CRL is an important way for the group getting access to land bank. The basic procedure is: the parent company usually buys new land at the land auction a year ago and finishes the first class land development, shoulders the risks and capital cost in early period, and then injects into listed company at the project to be producing or generating cash flow. Relatively low cash flow risks and faster turnover rate would benefit CRL.

China Resources Group has massively injected land assets into CRL in 2005 and 2006. In December 2007, with RMB 4.53 billion, CRL purchased the high quality land in Dalian Economic and Technological Development Zone, Hangzhou and Wuxi, with GFA amounts to 1.5 million sq.m.. As return, this transaction involved 269 million newly issued stocks, with RMB 16.83 per share payment, increased China Resources Groups shareholding from 59.36% to 62.07%.
In 2007, by means of large shareholders asset injection and market acquisition, CRL increased land bank by 4.926 million sq.m., amount to around 15 million sq.m. up to now. The 5.4 million sq.m. land bank of China Resources Group will be successively injected into CRL in 2-3 years.
2007-2008 performance outburst growth
CRL would have a sustained great growth on sales in 2007-2008. It is estimated that GFA sold of CR Land is approximately 0.65 million sq.m., with sales volume totals RMB 7.05 billion. GFA booked in 2007 has reached to 0.59 million sq.m., rose 47.5% than 2006. The sales turnover has reached RMB 6.4 billion, 115% increase than 2006. And with the open of Shenzhen MIXc, the groups rental income of investment property will soar, and is estimated to reach RMB 1.02 billion.
In 2008, CRL will accomplish many projects, among which a large portion was already sold in 2006-2007. The GFA completed is expected to more than 1.8 million sq.m., GFA booked with 1.44 million sq.m., sales turnover with RMB 1.39 billion


Gradually optimizing financial index
Light asset, high turnover is the rapid development strategy for many property developers lately, while in recent years development for CRL, the investment property income contributed for a large proportion in the groups performance, and relatively low property sales turnover directly effected the groups performance and returns to shareholders. (see Fig. 3) We believe that the groups stable expansion strategy and major shareholder China Resources Groups integration on the property business were the main reasons for such situation generated. The property asset successively injected by China Resources Group includes land, commercial property and other various type assets, for which not only influenced the capital structure of CRL, but also the groups development strategy. The merit for this strategy is comparatively low debt level, and significantly decreased financial risks. According to statistics, the average asset-liability ratio for CRL in 2002-2006 was about 51%, and10% lower than the industrial level. With the adjustment of development strategy, and the gradual release for property development performance in 2007-2008, the groups financial index would be gradually optimized.


Evaluation
We anticipate in 2007 and 2008, CRL will finish 0.59 million and 1.44 million sq.m. GFA booked respectively, generating RMB 6.4 billion and RMB 13.9 billion prime operating income, with RMB 1.86 billion and RMB 3.63 billion net profit, equals HK$2.008 billion and HK$ 3.919 billion.
We forecast that after acquiring the projects in Dalian, Wuxi and Hangzhou, NAV per share for CRL will reach HK$ 16.43 at the end of 2007. Then, the group would further be rewarded with China Resources Groups investment, with possible prospect of reaching NAV HK$ 18.96 per share at the end of 2008. Taking into consideration of the impact of macro control and the groups own feature, we give 5% discount. The 12-month target price for CRL is HK$ 18.02, 36% premium increase than present price, and 18.56 times of EPS in 2008. We give CRL "Buy" rating.