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China Overseas Land (688 HK) Summary

Core Content and Key Information

China Overseas Land (COLI) is a major real estate company in China with a current share price of HKD18.80 and a market capitalization of USD19.8B. The company's target price is set at HKD25.0, which represents a 33.0% increase from the current price. The analysts from Maybank Kim Eng reiterate a BUY recommendation, citing the company's strong fundamentals and attractive valuation.

COLI's FY13 core net profit was HKD18.96b, in line with expectations, but its gross profit margin (GPM) was 32.5%, 3.6ppt below the forecast and 3.8ppt below the Bloomberg consensus. The weaker GPM was primarily due to one-off factors, including a high exposure to affordable housing (10.9% of revenue) and the negative impact of three revalued projects repurchased from a PE fund.

The company is expected to see improved GPM in FY14 and FY15, at 34.3% and 35.0% respectively, which is an upward trend compared to the previous year. COLI's FY14 contract sales target is set at HKD140b, with the analysts maintaining a forecast of HKD175b, indicating a 25% YoY increase.

Main Points

• GPM and Profit Performance:

  • FY13 core profit was in line with expectations, but GPM was lower than forecast and consensus due to one-offs.
  • Management expects the negative impact of the repurchased projects to be largely reflected in FY13, with less impact in FY14.
  • Affordable housing accounted for 10.9% of total revenue in FY13, with a GPM of 5–10%. COLI expects this to decrease in FY14.

• Financial Health:

  • End-2013 net gearing was 28.5%, lower than the forecast of 31.4% and up from June-13's 15.0%.
  • COLI maintains a healthy cash collection ratio, with 85–90% of FY13 revenue collected in the same year.
  • Management indicated that around 30% of FY13 buyers were cash buyers, supporting the high cash collection ratio.

• Valuation:

  • COLI's current valuation is close to the 2008 GFC trough, with a 33% discount to NAV.
  • The core FD P/E ratio for 2014 is 6.7x, and for 2015 it is 5.3x.
  • P/BV for 2014 is 1.2x and for 2015 is 1.0x, indicating strong value.

• Future Outlook:

  • The company's FY14 guidance is considered conservative and prudent.
  • COLI expects a flat new project commencement, which is expected to prevent inventory accumulation.
  • The analysts believe the share price has over-corrected, and the company is one of the best-run property companies in China.

Key Figures

Market Position and Competitors

COLI is compared to other major property developers in the region, including Agile, Country Garden, CRL, Evergrande, Franshion, Greentown, GZ R&F, Hopson, KWG Property, Longfor, Poly Property, and Yuexiu Prop. COLI's performance and valuation are seen as competitive, especially with its strong cash flow and conservative approach to new projects.

Downside Risks

• Adverse macroeconomic developments or unexpected tightening could lead to lower-than-expected sales or margins.
• Excessive fund redemptions on the buy-side may impact the company's performance.
• Less NAV-accretive acquisitions or M&As could affect the company's growth trajectory.

Conclusion

COLI's financials remain strong, with a conservative approach to new projects and a focus on cash collection. The company's current valuation is attractive, and the analysts believe it is undervalued compared to its net asset value. Despite the one-off factors affecting FY13's GPM, the company is expected to recover in the coming years. The reiteration of a BUY recommendation and the target price of HKD25.0 suggest strong confidence in the company's future performance.