Powerlong:Tight Shanghai policy priced in;u/g PWRLNG 20s from Hold to Buy

We believe tight policy on Shanghai homes on commercial land use rights hasbeen priced in; new launches to be 4Q17heavy

    Over the first seven months of the year, Powerlong attained RMB10.63bn ofcontract sales, up only 23% YoY, underperforming the China property HYsector simple average of 36%. Powerlong’s management believes they canachieve their 2017contract sales target of RMB20bn, despite its 8M17lock-inratio being only 60.4% vs. its full year target. In 2H17, the developer plans tohave about RMB17.5bn of new saleable resources. Furthermore, the keylaunches will be residential and commercial saleable resources in Hangzhou,Ningbo and Haikou, and new launches should lead to solid contract sales inthe remainder of the year. Having said that, its 2H17contract sales should be4Q skewed (e.g., its Haikou project is slated to be launched in Dec).

    We like Powerlong’s growing recurrent income

    In 1H17, the company’s rental and management fees grew by 38% YoY toRMB0.85bn. Management guides for a 26% YoY growth in full year rental andmanagement fees for 2017, which would be a similar growth rate as in 2016.In 2H17, Powerlong plans to open Shanghai Wujing Powerlong Plaza, HuaianPowerlong Land, and Fuyang Powerlong Plaza, of which the first two alreadyopened in July and have occupancy ratio of over 90%. We believe

    Powerlong’s growing recurrent income provides a potential buffer against apossible slow-down in commercial property sales. Completed properties heldfor sale remained stable HoH at RMB11bn at end-June.

    Manageable landbanking in 1H17

    Powerlong acquired six projects in China with attributable land premium ofRMB5.6bn (see Fig 4) in 1H17. It also made a small investment in a NewJersey project in U.S. with another developer Landsea. Although we do notrule out Powerlong might add some overseas exposure in the future, thecompany will continue to focus on China property and we expect overseasassets to be a small portion of total only. We expect Powerlong to post anegative net operating cashflow of about RMB2bn for full year 2017.

    Diversified fund channels continue

    In August, Powerlong managed to issue RMB1.0bn of on-shore MTNs with acoupon of 6.8%; and there is still RMB2.0bn of unused quota for on-shoreMTNs, which we welcome. Its average funding cost continued to edge downfrom 2015’s 7.55% to 2016’s 6.18% to 1H17’s 6.09%.

    Upgrade Powerlong 5.95% 2020s from Hold to Buy on the back of constructivevaluations and our belief that Shanghai tightening measures are priced inWe upgrade Powerlong USD300mn 2020s (ask price: 100.25, YTM: 5.85%,Z+426bp) from Hold to Buy. This 3-year bond is rated B2/B- by Moody’s/S&P.Compared to TPHL 6.25% 2020C19s (issue rating of B2/B/B+ byMoody’s/S&P/Fitch) which trade at ask price 103.125(with ask YTM: 4.83%and Z+328bp), Powerlong’s bond provides a Z-spread pick up of almost 100bpwith a maturity of six months after Times’. Downside risks include harsherthan-expected policy or further tightening in commercial property, slow-downin cash collection ratio, and aggressive landbanking.