Shanghai Lingang announced that it has newly acquired a land parcel in the core area of Dishui Lake region. The commercial part of the land boasts the potential for value appreciation, while the residential part enjoys ample headroom for earnings growth. The Company is a park developer truly committed to improving the operational efficiency of parks and serving the real economy. Even if there are residential parts in its　acquired land parcels, they are usually used for supporting facilities under　the theme of integrating industry and city. Focusing on the greater Shanghai region, Shanghai Lingang has made business layouts in five new towns, accumulated a large number of high-quality park assets, and continuously optimized its revenue and profit structure. With sufficient under-construction projects and land bank, the Company has clear visibility in revenue and earnings growth. It may also benefit from the development of China’s real estate investment trust （C-REIT） market, open up the channels for asset exit, increase earnings, speed up capital return, and improve return on equity （ROE）。 We assign Shanghai Lingang a target 2023E market cap of Rmb42.1bn, corresponding to a target price of Rmb16.7, and reiterate the "BUY" rating.

Shanghai Lingang announced its acquisition of a land parcel in the Jinrong Bay area of Dishui Lake region.

In Jul 2023, the Company announced its acquisition of a parcel of land in Lin-gang Special Area, which consists of Plot B05-01 of Unit PDC1-0103 and Plot C07-01 of Unit DSH-04, for Rmb3.9bn. The planned gross floor area （GFA） amounts to 520,000 sqm, with the average land price at Rmb7,481/sqm. According to the land planning documents, the two plots are on the north of the Jinrong Bay area of Dishui Lake region, close to Huanhu No. 3 Road, less than 2km away from the waterfront of Dishui Lake and 3.6km away from the Dishui Lake Station of Shanghai Metro Line 16, boasting superior geographical advantages.

We believe that Shanghai Lingang will sell part of its property assets and hold the rest for rent to continuously expand its core resource portfolio. According to the land planning documents, Plot B05-01 is designated as a mixed-use plot that combines C2 （accounting for no more than 35%） and C8, which means it will be mainly used for commercial service and offices. With a GFA calculated for plot ratio of 330,000 sqm and an underground GFA of 100,000 sqm, the plot is planned to accommodate businesses, services, hotels, finance, insurance, securities, consulting and other related industries. Plot C07-01 is designated for R3 residential housing, with a GFA calculated for plot ratio of 190,000 sqm and an underground GFA of 80,000sqm; at least 1,573 housing units should be built there. The plot is primarily planned for high-rise residential buildings. According to CREIS, the surrounding property projects are generally sold at a price between Rmb31,000 and Rmb34,000 per sqm.

Shanghai Lingang increases its resource reserve by incubating industries and operating property projects, rather than by leveraging　　cyclical opportunities.

It seems that the Company once again acquired a low-cost and high-value land parcel that boasts superior geographical advantages just by leveraging cyclical opportunities. However, we believe that the key for the Company to continuously increase its core resources lies in its strong capabilities to incubate industries and operate property projects. In the Lin-gang Special Area, for example, the projects near Dishui Lake, which are not developed by Shanghai Lingang at first, underperformed those developed by the Company in terms of industry operation and investment attraction. The rise of Lin-gang Special Area has not only contributed to the development of Shanghai Lingang, but also partly reflected the Company's capabilities. In essence, Shanghai Lingang is not an enterprise that makes money by real estate development, but a platform that promotes sustainable operations through sustainable industrial development, and get a sustainable rental revenue. In 2022, the fixed asset investment of enterprises settling in parks owned by the Company increased by 50% YoY, and their combined tax payments grew by 12% YoY.

The operating service business continues to expand; REITs help improve the closed-loop of investment, financing, management and exit. By the end of 2022, Shanghai Lingang earned 45%/58% of its revenue/gross profit from leasing and other operating services. After years of development, its revenue and profit structure has undergone fundamental changes. As of 1Q23, the GFA of property leased by the Company amounted to 3.04mn sqm. Looking ahead, we expect the Company to integrate investment, financing, management, and exit by relying on the C-REIT market, which has bottomed out, and the quality underlying assets of the C-REIT platform under its parent company Lingang Group.

Potential risks:

Fluctuations in the rents of some parks operated by Shanghai Lingang since they have not yet reached maturity; Losses from some fund investments and investments of Shanghai Lingang on park industries; Macroeconomic downturn exceeds expectations, resulting in the risk of weakening demand for park leasing.

Investment recommendation:

Shanghai Lingang is a park developer truly committed to improving the operational efficiency of parks and serving the real economy. Even if there are residential parts in its acquired land parcels, they are usually used for supporting facilities under the theme of integrating industry and city. Focusing on the greater Shanghai region, Shanghai Lingang has made business layouts in five new towns, accumulated a large number of high-quality park assets, and continuously optimized its revenue and profit structure. With sufficient under-construction projects and land bank, the Company has clear visibility in revenue and earnings growth. It may also benefit from the development of the C-REIT market, open up the channels for asset exit, increase earnings, speed up capital return, and improve ROE. Referring to the cash distribution and valuation levels in the C-REIT market, the post-strategic-investment valuation of the Company's wholly-owned subsidiaries and the PE valuations of comparable companies （like Zhangjiang Hi-Tech （600895.SH）， according to Wind consensus estimates）， we assign Shanghai Lingang a target 2023E market cap of Rmb42.1bn, corresponding to a target price of Rmb16.7, and reiterate the "BUY" rating.