20180823-兴业金融证券-中国海外宏洋集团-00081.HK-Upgrade_to_NEUTRAL_on_Margin_Recovery_14页_631kb

Summary of China Overseas Grand Oceans (COGO)

Core Content

China Overseas Grand Oceans (COGO), a subsidiary of China Overseas Land and Investment, has shown improved performance in its 1H18 results, with core profit reaching CNY1bn, a 42.1% YoY increase. The gross profit margin (GPM) was a major surprise at 24.7%, surpassing the initial FY18 forecast of 19.9%. The company also announced an interim dividend of HKD0.03/share, a 200% YoY increase.

Despite the positive results, the company's growth prospects remain uncertain due to its narrow diversification in Tier-3 and Tier-4 markets, which exposes it to policy risks. As a result, the rating has been upgraded to NEUTRAL from Sell.

Main Points

• 1H18 Results:

  • Core profit: CNY1bn (+42.1% YoY)
  • GPM: 24.7% (vs forecast of 19.9%)
  • Interim dividend: HKD0.03/share (+200% YoY)
  • Core net profit margin: 9% (historical high)

• Margin Recovery:

  • GPM rebounded due to strong performance in Tier-3 markets.
  • Forecasted GPM for FY18F and FY19F: 22.9% and 22.6%, respectively.
  • The company expects a significant improvement in GPM.

• Balance Sheet:

  • Raised HKD4.6bn through a rights issue in Feb 2018.
  • Net gearing reduced to 0.3% and cash balance increased to HKD32.3bn.
  • Net debt to equity: 19.7% for FY18F, expected to rise to 35.7% by FY20F.

• Contracted Sales:

  • As of 7M18, delivered HKD32.5bn contracted sales, equivalent to 72% of FY18F forecast of HKD44.8bn.
  • Strong momentum led to an upward revision in contracted sales forecast, expecting 40–50% YoY growth in FY18.

• Earnings Forecasts:

  • FY18F–20F recurring net profit: HKD1,863m, HKD2,175m, HKD2,669m.
  • Earnings growth: 10%, 8%, and 14% respectively.
  • Recurring EPS: HKD0.54, HKD0.64, HKD0.78.
  • DPS: HKD0.08, HKD0.10, HKD0.12.

• Valuation:

  • Target price: HKD2.60 (based on a 65% discount to end-FY18F ENAV of HKD7.50).
  • P/E: 5.00 (FY18F), 4.28 (FY19F), 3.49 (FY20F).
  • P/B: 0.32 (FY18F), 0.32 (FY19F), 0.31 (FY20F).
  • Net debt to equity: 4,102m (FY18F), 8,078m (FY20F).

• Key Risks:

  • Weak GPM remains a concern.
  • Policy risks in Tier-3 and Tier-4 markets.
  • Limited diversification compared to other developers.

Key Information

• Company Profile:

  • Established in 1955, listed in 1984.
  • Focus on residential property development in emerging Tier-3 cities.
  • Acquired by COLI in 2010.

• Share Data:

  • Market Cap: USD1,186m.
  • Avg Daily Turnover: HKD19.3m.
  • 52-wk Price Range: HKD2.50–5.96.
  • Free Float: 48%.
  • Shares Outstanding: 3,423m.

• Shareholders:

  • China Overseas Land and Investment: 38.3%
  • Yung Kwok Kee: 13.5%

• Share Performance:

  • Absolute: -36.5% YTD, -32.0% 12m.
  • Relative: -29.2% YTD, -32.5% 12m.
  • Dividend Yield: 4.3% (FY20F).

• Financial Highlights:

  • Revenue growth: 23.2% (FY18F).
  • Gross margin: 22.9% (FY18F).
  • Operating margin: 20.3% (FY18F).
  • Net margin: 9.1% (FY18F).
  • Effective tax rate: -54.5% (FY18F).

• Peer Comparison:

  • COGO's P/E and P/B are below the large peer average.
  • COGO is positioned as a mid-and small peer with lower valuation multiples.
  • Compared to peers like Vanke and Country Garden, COGO has a lower P/E and P/B but higher growth potential.

Conclusion

COGO has demonstrated positive financial performance with improved margins, a strong balance sheet, and robust contracted sales. However, the company faces challenges due to its limited diversification and exposure to policy risks in lower-tier cities. The NEUTRAL rating reflects the cautious outlook on the sustainability of its growth. The target price of HKD2.60 is based on a 65% discount to end-FY18F ENAV.