First Sponsor (Initial Assessment)

Rosesyrup Research

First Sponsor (Initial Assessment)

Call: Short

Target Price:$0.947

Introduction

• Sinked immediately after IPO and close at $1.44. 
• Below IPO price of $1.50

1. Property bubble

• First Sponsor is a Chinese developer.
• Valuation is affected by fear for china housing bubble and fall in property prices
• Business situated in Chengdu and Dongguan, a 2nd tier city, where housing is more likely to exist.

1. High Debt

• Leverage make up nearly 60% of total asset. Very highly leverage as compared to most peers like 
• In China, funds and banks have refrained from lending to highly leveraged property developers. 
• Possible cashflow problem in near future
• High interest cost due to China shadow banking problem

Valuation

• Method: P/E Ratio
• Rationale=> It reflects investors' confident in a company bottom line. This is better than a DCF model since current property price (which make up large amount of the company's asset) is highly volatile and therefore less meaningful.
• Current P/E = 8.706X
• Comparable Companies
• Xiamen ITG has P/E of 6.49X and leverage of 39.68% only
• Poly Real Estate has P/E of  5.73X and leverage of 31.56% only
• Optimistic Target Price: $0.947
• Pessimistic Target Price: $0.827

Conclusion

• Downside: 51.9%
• Call=> Short
• Relatively low volume on its first day of trading. Only $1.6M of shares traded.
• Thus I believe the initial shareholders and private placement holders have yet to dump their shares in the market.
• However, as it become clear that First Sponsor won't be able to hold above $1 mark, these shareholders will start to massively cash out as they trample for exit. 
• There is a possibility for price to sink below the pessimistic target due to bad sentiment.
• Time frame: Within 2 weeks from this post.