Rapid earnings growth in 3Q23 has turned Shanghai Lingang's 1-3Q23 earnings to positive YoY growth from decline. Its property rents in its leasable parks went up slightly, and property sales increased rapidly in 1-3Q23. The Company also achieved impressive QoQ growth in housing starts and land acquisition in 3Q23. We believe that what determine the development of Shanghai Lingang are the small environments of Lingang Special Area and other areas, instead of the real estate sector's overall environment, or the industrial park sector's overall supply and demand dynamics. 3Q23 earnings have passed the trough of growth. Considering that Shanghai Lingang is gearing up on both land acquisition and housing sales, we expect the Company to maintain high-quality growth and generous cash dividend payout in the future.

1-3Q23 earnings up by 2% YoY.

In 1-3Q23, Shanghai Lingang achieved revenue/gross profit/attributable net profit (ANP) of Rmb3.31bn/2.17bn/750mn (-33%/-17%/+2% YoY) respectively. The Company's ANP decline by 6% YoY in 1H23, but returned to the growth channel in 3Q23, registering a growth of 32% YoY.

Record-high rents and operating service revenue in 3Q23.

In 3Q23, Shanghai Lingang generated revenue of Rmb760mn from rents and Rmb100mn from operating services. The total amount (Rmb860mn) was a record high. By the end of 3Q23, the Company had 3.12mn sqm by gross floor area (GFA) of leasable properties in its parks. Calculated with revenue, the average rent was Rmb81.5/sqm/month (+5% YoY) in 3Q23. High rents testified that real industries are operating well in the parks owned by Shanghai Lingang. Apart from leasable assets in steady operations, the Company also benefits from the development of the C-REIT market. In the long run, the Company has headroom for revitalizing its balance sheet.

Booming sales and proactive investments.

In 1-3Q23, Shanghai Lingang achieved sales revenue of Rmb1.37bn (+26% YoY), sales by GFA of 67,000sqm (+10% YoY, with an ASP of Rmb20,480mn/sqm). In 1-3Q23, the Company's cash inflows from selling goods and providing services totaled Rmb4.7bn (+39% YoY), significantly outperforming common real estate developers. At the end of the period, Shanghai Lingang's contractual liabilities and advance receipts amounted to Rmb3.75bn, a record high. The Company is proactive in acquiring land plots and starting housing projects. In 3Q23, Shanghai Lingang announced housing starts by GFA of 367,000sqm and incremental land banks of 314,000sqm.

CREIS data show that the Company's incremental land banks have a GFA of 883,000sqm and an average land price per floor area of Rmb6,055/sqm. We believe that what determine the development of Shanghai Lingang are the small environments of Lingang Special Area and other areas, instead of the real estate sector's overall environment. Proactive investments have laid the foundation for the Company's future earnings growth.

Transfer of Hydrogen Energy Co, and intention to acquire the shares of Fund Co.

On Oct 27, 2023, Shanghai Lingang announced that it planned to transfer 50% equity of Shanghai Lingang Hydrogen Energy Industry Development Co., Ltd. (hereinafter referred to as the "Hydrogen Energy Co") to Lingang Group at a price of Rmb300.63mn. Meanwhile, the Company intends to acquire the shares of Shanghai Lingang Special Area Hydrogen Energy Private Investment Fund Partnership (Limited Liability Partnership, hereinafter referred to as the "Fund Co") held by the Hydrogen Energy Co, as well as to build a new energy value chain of green and low-carbon industries. By way of investing in new energy companies to enjoy the dividends of their development, the Company is changing from "landlord" to "shareholder" role at an accelerated pace. We believe that this deal may reduce Shanghai Lingang's inputs in functional facilities over a period to come, cut capitalized spending on immature areas, increase the dividends from new industry development and improve the Company's profitability.

Potential risks： Fluctuations in the rents of some parks that are operated by Shanghai Lingang but have not yet reached the period of stable growth; losses from some fund investments and investments of Shanghai Lingang on park industries.

Investment recommendation： Shanghai Lingang focuses on the development of relevant industries and comprehensively develops core areas. As a result, the Company enjoys stable rents and strong sales growth. Shanghai Lingang has also passed trough of growth in 3Q23. Considering that Shanghai Lingang is gearing up on both land acquisition and housing sales, we expect the Company maintain high-quality growth and generous cash dividend payout in the future. We retain our 2023E/24E/25E EPS forecasts of Rmb0.65/0.69/0.76 for Shanghai Lingang.

Based on the dividend yield and valuation levels of the C-REIT market, the valuation of the Company's wholly-owned subsidiary (Caohejing Hi-Tech Park Development) after introducing strategic investors, and the PE valuations of comparable company Zhangjiang Hi-Tech Park Development (600895.SH), we maintain our market cap forecast at Rmb42.1bn and the target price of Rmb17 for Shanghai Lingang, and reiterate the "BUY" rating.