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Morningstar | COLI Interim Results a Small Beat, Faster Growth Ahead

China Overseas Land & Investment's, or COLI's, reported interim 2017 results were slightly better than our expectation, driven by higher margin. Core profit, excluding the revaluation gain was CNY 19.2 billion, up 14% year on year, accounting for 47% of our full-year estimate. While revenue was only up less than 2%, gross profit was up 19% as gross margin expanded 530 basis points year on year to 35.8%. The margin was supported by high ASP, and well-controlled selling and administrative expenses. The company announced an interim dividend of HKD 0.40 per share, 14% higher from a year ago. The top line and core profit were 37% and 42% of our full-year estimate. We made minor adjustments to our margin assumptions on development properties for the next two years, resulting in core earnings increasing by 3% and 2% in 2018 and 2019, respectively. The changes had minor impact on overall valuation. We maintain our fair value estimate of HKD 34, and the company’s no-moat rating.

For the property development segment, revenue was HKD 86 billion with segment profit of HKD 31 billion, up 20% on the account of higher gross margin. Year to July, the company achieved contract sales of HKD 174 billion, up 21% year on year, with the growth attributed to equal parts of average selling price, or ASP, and volume growth. In comparison, during the same period a year ago, contract sales growth was almost entirely driven by higher gross floor area, or GFA, sold. We expect the continued increase in ASP to sustain the margin expansion for the full year and beyond.

During the period, the company acquired GFA 8 million square meters for HKD 46 billion. The pace is roughly on par with the fast pace seen during 2017. Land bank totaled 67 million square meters at the end of period, unchanged slightly from year-end. The company stated that its salable resource will reach a record high during the second half of the year.

Given the year to July run rate of 60% to full year target of HKD 290 billion, we expect the company to exceed the full year target by a small margin. Full year contract sales should hit 35% growth year on year growth, comparing to anemic rate of 10% and 16% in 2017 and 2016.
After obtaining government approval, the company also launched its share option scheme by granting 107 million shares to 400 executives. Supported by a newly incentivized workforce, full pipeline of sellable resources and a much-improved margin, we believe the company is likely outperform its peers going forward, redeeming the subpar performance over the past two years.
The effective interest rate during the period was only 4.4%, roughly the same level as that see at year-end. The company’s debt exposure has about 20% in foreign exposure, exposing the company to some risk of continued CNY depreciation. The dividend payout ratio was 23% based on adjusted core earnings, same as a year ago, but on the low side from peers. The company ended the year with net gearing of 28%, unchanged from year-end. We expect gearing to rise to near 40% as the company continues to expand its operation, with an aim of a long-term sales target of HKD 400 billion by 2020.