We believe that the core factors for measuring Shanghai Lingang’s development are not its short-term revenue and settlement earnings, nor even the growth rate of rent and service fees, but the focus on the quality development of the industrial parks. The parks operated by Shanghai Lingang have made continuous breakthroughs in clustering industries. We believe that as the owner, lessor and seller of park properties, the Company will enjoy continuous benefits. Moreover, the sustained double-digit growth in stable leasing and service income lays a short-term material foundation for the Company’s emphasis on shareholder returns.

A temporary trough of settlement earnings will not dampen the full-year earnings result.

In 1H23, Shanghai Lingang announced revenue of Rmb2.08bn (-38% YoY, due to insufficient settlements during the period), gross profit of Rmb1.4bn (-27% YoY) and attributable net profit (ANP) of Rmb550mn (-6% YoY). The Company’s overall sales and settlement peak periods have always been in the second half of the year, and wholesales and overall delivery account for quite large proportions in the Company’s revenue. Therefore, we are not worried about Shanghai Lingang’s full-year earnings growth.

Park operation results beat expectations with quarterly rents and operating service revenues hitting new highs.

Based on Shanghai Lingang’s announcements, as of the end of 1H23, the annual fixed asset investments by enterprises within the industrial parks owned by Shanghai Lingang totaled Rmb14bn (+48% YoY), the revenue scale of enterprises within the parks exceeded Rmb683.5bn (+57% YoY), and the total tax payment by enterprises within the parks surpassed Rmb20.6bn (+73% YoY). We believe that the growth of enterprises within Shanghai Lingang’s industrial parks significantly outperforms that of the macro economy, which testifies the Company’s regional footprints and operational advantages. The Company announced that its 2Q23 rents and operating service revenues totaled more than Rmb800mn, a new high since its establishment, and its 1H23 property leasing revenue increased by 12% YoY.The slower growth in rent than the growth in revenue of the enterprises within the parks owned by Shanghai Lingang indicates that the Company still has huge potential in rent revenue growth. In our opinion, one of the Company’s core highlights is the 3.2mn sqm (still expanding) park properties in Shanghai.These investment properties are located in the most vibrant region of the Chinese economy, so we believe that their rents will grow continuously.

Contract liabilities and advance receipts hit record highs, ensuring the saleable resources.

In 1H23, Shanghai Lingang’s cash inflows from selling goods and offering services totaled Rmb3bn (+55% YoY). At the end of the period, the Company’s contract liabilities and advance payments amounted to Rmb3.56bn, a new record high. Large contract liabilities and advance receipts mean future revenues, which in turn guarantee stability in the Company’s future earnings. Moreover, the Company boasts abundant properties in the Dishui Lake Financial Bay and other projects, guaranteeing saleable resources after 4Q23.

A healthy development pace and an active replenishment of land banks.

Relying on its own core capacity of industrial operations, Shanghai Lingang keeps acquiring high-quality land plots. On Jul 15, 2023, the Company announced its acquisition of a parcel of land in Lin-gang Special Area. The planned gross floor areas (GFAs) total 520,000 sqm, with a total land price of Rmb3.9bn, and a floor area price at Rmb7,481 per sqm. The location of the plot is excellent, with a distance of less than 2 kilometers from Dishui Lake and 3.6 kilometers from Dishui Lake Metro Station. The Company continues to deepen its core strategic areas, acquiring premium land to maintain land reserves and ongoing projects. According to the Company’s announcement, during the reporting period, the Company’s housing starts/completions by GFA were 22,000 sqm/482,000 sqm, respectively. As of the end of 1H23, Shanghai Lingang and its subsidiaries collectively hold 400,000 sqm of to-be-developed land, with a total under construction GFA of 5.16mn sqm across various property types. As the Company focuses on industrial parks, it does not require excessive upfront resource reserves, which might lead to a sustained higher proportion of ongoing construction area to total reserves.Regardless of fluctuations in the real estate market, the Company anchors itself in industrial parks, steadily advances its development pace, and continues to acquire high-quality land reserves at reasonable costs, showing a sustainability far surpassing residential developers.

Healthy financials and continuous dividend payouts.

By the end of 1H23, Shanghai Lingang had an interest-bearing liability ratio of 37% and a net gearing ratio of 69%, indicating a reasonable and healthy leverage. The Company announced that during the reporting period, it takes multiple measures to reduce financing costs and improve the efficiency of capital use, and that it would explore the use of capital market instrument such as Chinese real estate investment trusts (C-REITs). In 2022, Shanghai Lingang’s dividend payout ratio was as high as 50%. We expect that with the further optimization of its leasing and sales composition, the Company will maintain a very generous dividend payout ratio in the future, which shows the true nature of a “cash cow”.

Potential risks: Fluctuations in the rents of some parks operated by Shanghai Lingang as these parks have not yet reached the period of stable growth; losses associated with some fund investments and investments on park industries.

Investment strategy: We believe that the core factors for measuring Shanghai Lingang’s development are not the Company’s short-term revenue and settlement earnings, nor even the growth rate of rent and service fees, but the quality development of the parks. The industrial parks operated by Shanghai Lingang have made continuous breakthroughs in clustering industries. We believe that as the owner, lessor and seller of park properties, the Company will enjoy continuous benefits. Moreover, the sustained double-digit growth in stable leasing and service income lays a short-term material foundation for the Company’s emphasis on shareholder returns. We maintain our 2023E/24E/25E EPS forecasts of Rmb0.65/0.69/0.76 for the Company. Based on the dividend yield and valuation levels in the C-REITs market, the valuations after introducing strategic investors of the Company’s wholly-owned subsidiaries and the PE valuations of comparable companies, we maintain our market cap forecast at Rmb42.1bn and the target price of Rmb17, and reiterate the “BUY” rating.