I maintain a Neutral rating on Hong Kong-listed Mainland China property developer Greentown China Holdings, Ltd. (OTC:GTWCF) [3900:HK].
This is an update of my prior article on Greentown China published on April 17, 2020. Greentown China’s share price has almost doubled from HK$7.49 as of April 16, 2020 to HK$14.78 as of October 12, 2020, since my last update. The key reasons for Greentown China’s share price surge in the past few months include better-than-expected September 2020 contracted sales, the successful spin-off of its project management business Greentown Management Holdings Company Limited [9979:HK] as a separate listed entity on the Hong Kong Stock Exchange, and the introduction of a new strategic shareholder via a share placement.
Positives have been priced in, with Greentown China’s current valuations being unattractive. Greentown China trades at 9.3 times consensus forward FY 2021 P/E, while most Hong Kong-listed Mainland China property developers are valued at mid single-digit P/E multiples. The stock’s consensus forward FY 2021 dividend yield of 2.6% is also not appealing, compared to its peers which typically offer high single-digit dividend yields. As such, I retain my Neutral rating on Greentown China.
Readers have the option of trading in Greentown China shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the ticker GTWCF or on the Hong Kong Stock Exchange with the ticker 3900:HK. For those shares listed as ADRs on the OTCBB, note that liquidity is low and bid/ask spreads are wide.
For shares listed in Hong Kong, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Hong Kong Stock Exchange is one of the major stock exchanges that is internationally recognized and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $15 million and market capitalization is above $4.7 billion, which is comparable to the majority of stocks traded on the US stock exchanges.
Institutional investors who own Greentown China shares listed in Hong Kong include The Vanguard Group, Dimensional Fund Advisors, Polunin Capital Partners, and State Street Global Advisors, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage, such as Interactive Brokers or Fidelity, or international brokers with Asian coverage, like Hong Kong’s Monex Boom Securities and Singapore’s OCBC Securities.
September 2020 Contracted Sales Were Above Expectations
Greentown China released the company’s monthly unaudited operating data for the month of September 2020 on October 6, 2020 after trading hours, and the company’s share price jumped by +12% from HK$12.36 as of October 6, 2020 to HK$13.86 as of October 7, 2020. It is clear from the stock’s share price reaction post-announcement that the market is very positive on Greentown China’s September 2020 operating data.
The company’s contracted sales (excluding projects under project management for which Greentown China has no stake, but projects are sold under the ‘Greentown’ brand) grew by +69% YoY from RMB11.9 billion in September 2019 to RMB20.1 billion in September 2020. On a year-to-date basis, Greentown China’s contracted sales in the first nine months of 2020 were RMB113.9 billion, representing a +43% YoY increase as compared to 9M2019 contracted sales of RMB79.5 billion. If contracted sales of the projects under project management were included as well, Greentown China’s total contracted sales would have been RMB160.7 billion for 9M2020, which is equivalent to a +30% YoY increase.
At the company’s earlier 1H 2020 results briefing (audio recording and transcript not publicly available) on August 28, 2020, Greentown China emphasized that the company is very confident in meeting its full-year FY 2020 contracted sales target (including projects under project management) of RMB250 billion (or RMB180 billion excluding under project management). The company disclosed that it plans to launch 44 new property projects in 2H 2020, of which the majority of these new launches are in areas with relatively strong housing demand. Two-thirds of these new projects are located in the Yangtze River Delta region, and approximately 83% of new launches for 2H 2020 are either in first-tier or second-tier Chinese cities.
Greentown China’s better-than-expected September 2020 contracted sales suggest it is more likely that the company can achieve its full-year contracted sales target. Given that contracted sales are a leading indicator of future revenue (recognized when the construction of projects is completed and delivered to buyers), the company’s robust year-to-date contracted sales should support future earnings growth.
Spin-Off Of Project Management Business Completed
Greentown China completed the spin-off of its project management business Greentown Management as a separate listed entity on the Hong Kong Stock Exchange on July 10, 2020, and Greentown China still holds a 73.17% equity stake in Greentown Management post-listing. Greentown Management earns management fees from third-party property projects, for which the company offers management expertise and allows the usage of the ‘Greentown’ brand.
In my prior article on Greentown China published on April 17, 2020, I had highlighted the planned spin-off of Greentown Management, and how it could help Greentown China to drive future growth, deleverage, and unlock value.
Greentown China received net proceeds in excess of HK$1.1 billion from the listing of Greentown Management. The company had stated in an earlier announcement on June 29, 2020 that more half of the IPO proceeds will be used to pay down debt, while a fifth of the IPO proceeds will be utilized to drive the future growth (both organic & inorganic) of the project management business.
More importantly, the spin-off of Greentown Management has had a positive impact on the re-rating of Greentown China’s valuations. Greentown Management currently trades at consensus forward FY 2020 and FY 2021 P/E multiples of 13.1 times and 12.0 times, respectively based on its share price of HK$3.01 as of October 12, 2020. In contrast, Greentown China was trading at a much lower 5.5 times consensus forward next twelve months’ P/E, when I published my prior article on Greentown China on April 17, 2020. Greentown China’s forward P/E multiples have expanded, as detailed in the “Valuation And Dividends” section of this article.
In other words, the value of Greentown China’s asset-light project management business was obscured when Greentown Management was a private, non-listed subsidiary of the parent company. Following the spin-off and with the market assigning higher P/E multiples to Greentown Management, it also helped in the positive re-rating of the parent company’s (Greentown China) valuations.
New Strategic Shareholder
On April 26, 2020, Greentown China announced that a Chinese conglomerate listed in Shanghai, Xinhu Zhongbao Co Ltd [600208:CH] has become the company’s third largest shareholder with a 12.95% equity interest, after it subscribed to 322 million new shares at a price of HK$9.50 per share. Greentown China’s largest and second largest shareholders are China Communications Construction Group Limited and Wharf Holdings Ltd (OTCPK:WARFF) (OTCPK:WARFY) [4:HK] with equity stakes of 25.06% and 22.36%, respectively.
Notably, the subscription price for the share placement represented a huge premium to Greentown China’s share price of HK$7.13 as of April 24, 2020. The share placement also played a key role in Greentown China’s valuation re-rating subsequently, as the subscription price of HK$9.50 per share set a new reference point for the price that strategic shareholders were willingly to payto own shares in the company.
In the share placement announcement, it was noted that both Greentown China and Xinhu Zhongbao intend to “explore opportunities for business cooperation in different projects from time to time, notably in the PRC real estate sector.” This implies that new strategic shareholder Xinhu Zhongbao will be another key source of land banking opportunities for Greentown China going forward. As an example, Greentown China spent approximately RMB4.1 billion to acquire stakes in multiple property projects in Shanghai and Qidong from Xinhu Zhongbao in April 2020.
Valuation And Dividends
Greentown China trades at 10.2 times consensus forward FY 2020 P/E and 9.3 times consensus forward FY 2021 P/E based on its share price of HK$14.78 as of October 12, 2020. In comparison, its five-year and 10-year average consensus forward next twelve months’ P/E multiples were 6.5 times and 5.2 times, respectively. The stock is also valued by at 0.56 times P/B, versus its five-year and 10-year mean P/B multiples of 0.43 times and 0.63 times, respectively.
Greentown China offers consensus forward FY 2020 and FY 2021 dividend yields of 2.2% and 2.6%, respectively. Sell-side analysts see Greentown China’s full-year dividends per share declining from RMB0.30 in FY 2019 to RMB0.28 in FY 2020, prior to increasing to RMB0.33 in FY 2021.
The key risk factors for Greentown China include future contracted sales falling short of market expectations, a significant share price decline for Greentown Management which could in turn lead to a de-rating of Greentown China’s valuations, and a failure to realize synergies with its new strategic shareholder.
Note that readers who choose to trade in Greentown China shares listed as ADRs on the OTCBB (rather than shares listed in Hong Kong) could potentially suffer from lower liquidity and wider bid/ask spreads.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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