China Aoyuan – a potential value play? (15 Jun 21)

Dear all

Against the backdrop of rising inflation, some market strategists have recommended “additional urgency” to rotate from technology plays to “old economy value stocks” to hedge against potential inflation pressures (as they believe such inflation pressures are not transitory).

A stock that may tick all the right boxes may be China Aoyuan (“Aoyuan”) (3883.HK). It belongs to the old economy stocks (i.e. property sector which may be a hedge against inflation) and seems to be a value play, given that it trades at HKD7.01 on 15 Jun 21.

 

Who is Aoyuan?

Quoting from a report by DBS Research which has a concise description of Aoyuan, “Aoyuan is a property developer with 57m sqm of land bank with a focus on the Greater Bay Area as at Dec-20. Aoyuan was founded in 1996 in Guangzhou and listed on the Stock Exchange of Hong Kong in 2007. Its founder and Chairman Mr. Guo Zi Wen has a 55.2% stake.”

 

What is so interesting about Aoyuan?

a) Total potential upside of around 80%

Based on Figure 1, average analyst target price on Aoyuan polled by Bloomberg is around HKD11.66. At the current price of HKD7.01, this equates to a potential capital upside of around 66%. Coupled with Bloomberg’s estimated dividend yield of around 13.9%, total potential return is around 80%!

Figure 1: Average analyst target HKD11.66

China Aoyuan Analyst 11 Jun 21

Source: Bloomberg 11 Jun 21

b) Widely covered by analysts provides some assurance

Based on Figure 1 above, it is assuring to see that there are 22 analysts covering Aoyuan with 20 analysts calling for a buy vs 2 holds. Based on my personal view, it is assuring for two reasons. Firstly, there seems to be sufficient analysts who have already researched Aoyuan. Thus, there is less chance of any “blind spots” or hidden traps in Aoyuan’s fundamentals yet to discover.  Secondly, if Aoyuan is covered by only a handful of analysts, some analysts may suddenly drop coverage, or its target price may swing quite a bit due to a smaller sample size.

c) Active investor relation calendar this month provides additional assurance

Based on Figure 2 below, Company is very active this month with at least six conferences ranging from 11 Jun (Haitong) to 29 Jun (see HERE for its calendar of seminars). Based on my personal view, generally speaking, if a company has nothing positive to say to the investment community, it is unlikely to waste so much management time to engage the investment community. Secondly, there is a chance that analysts may issue updated reports post these seminars which may potentially spur buying interest. (This assumes that the company shares a positive outlook during these seminars).

Figure 2: Numerous seminars planned this month

Figure 2_Seminars

Source: Company

d) 25% price decline in 8 trading days makes Aoyuan even more interesting

Since hitting a multi month intraday high HKD9.34 on 2 Jun 21, Aoyuan has slumped approximately 25% in eight trading days to trade HKD7.01 on 15 Jun 21. It looks interesting at current levels. During this period, it has ex div HKD 0.77 / share on 4 Jun. I.e. it has dropped much more than its dividend paid.

e) Trades at extremely low valuations either absolute or on relative basis

Aoyuan trades at low absolute PE and P/BV. Based on Bloomberg, it trades at 2.6x FY21F PE & 2.2x FY22F PE; 0.69x FY21F P/BV and 0.57x FY22F P/BV.

On a relative basis (see Figure 3), Aoyuan trades at close to two standard deviations away from 5Y average PE and approximate 0.5x standard deviation away from its 5Y average P/BV.

Figure 3: Trades below its 5Y average PE and P/BV

5Y PEBD 11 Jun 21

Source: Bloomberg 11 Jun 21

f) Chart seems to be getting oversold

Based on Chart 1 below, Aoyuan is approaching oversold level based on its RSI reading of 27.2 on 15 Jun 21. Notwithstanding this, it is noteworthy that Aoyuan’s chart seems to be weakening with declining exponential moving averages. Although there is some volume accompanying the recent sell-off, there is a good chance that the support around HKD6.71 – 7.00. At HKD6.71, it will be at a more than two year low level.

Near term supports: HKD7.00 / 6.85 / 6.80 / 6.75 / 6.71

Near term resistances: HKD7.33 / 7.50 / 7.72 – 7.75 / 7.84 – 7.88

Chart 1: RSI at 27.2 is oversold

Aoyuan chart as of 15 Jun 21

Source: InvestingNote 15 Jun 21

As usual, investments carry risks. The below is just to outline some of the potential risks.

 

Risks

a) Not extremely familiar in Aoyuan; but not a penny stock

This is my first write-up on Aoyuan and suffice to say that I am not extremely familiar to Aoyuan’s fundamentals. However, based on its market cap of around S$3.24b, it is similar in size to Ascott Reit in terms of market capitalisation.

b) Belongs to the yellow grade under the “Three Red Lines” category

In terms of leverage, Aoyuan belongs to the yellow grade under the “Three Red Lines” category defined by China. Various analyst reports cited that Aoyuan’s management plans to reduce its leverage so as to move to the Green grade.

c) Aoyuan’s unsold resources can support < 3 years of sales

Based on CICC’s research report dated 1 Apr 21, CICC estimates that Aoyuan’s unsold resources can support less than 3 years of sales. Thus, Aoyuan needs to strike a balance between investing more in land banking and property development and its leverage.

d) Volatile share price

Aoyuan share price is volatile. Its average trading range is around HKD0.30 which is easily 4.3% of its share price.

e) Usual business, policy or / and investment risks

Usual business risks such as deterioration in profit margins; slowdown in property sales either due to slower than expected completion or / and slowdown in demand. A lower-than-expected dividend payout ratio may also affect investor sentiment in Aoyuan. Furthermore, property companies in China may also face PRC’s policy risks.

 

Conclusion

Readers should be cognisant of the pros and cons in owning Aoyuan’s shares. Personally, what attracts me is its industry, earnings prospects, dividend yield and attractive valuations. Nevertheless, readers are reminded of some of the potential risks such as its usual business, policy, investment risks (see above) which you may face, in investing in Aoyuan. Clients / readers are encouraged to visit Aoyuan’s website HERE and do your own due diligence. Investments carry risk and its best to be familiar and comfortable in what you invest in.

 

P.S: I am vested and have informed clients to start looking into Aoyuan last Friday.

 

Disclaimer

Please refer to the disclaimer HERE

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