EUR 850.00 For Business Accounts Only

Morningstar | COLI's Full-Year Results a Miss on Lower Top Line, but Strong Margin Blunts the Earnings Shortfall

China Overseas Land & Investment, or COLI, reported full-year 2018 below consensus and our estimate. Core profit excluding valuation gains was CNY 37.1 billion, up 8% year on year, but it fell short of our projection by 9%, mostly attributed to the lower than expected top line. Core profit per share came in at HKD 4.10, up 10% year on year. The company announced a final dividend of HKD 0.50 per share, bringing the full-year dividend to HKD 0.90 per share, up 13% year on year. While the property development margin was strong, the expanded operational scale has yet to translate into higher booking and earnings. We adjusted our assumptions for sales, booking, and margins, resulting in 4% lower earnings for 2019, and unchanged fair value estimate of HKD 34 per share. Our no-moat rating is also unchanged.

Booked revenue was 15% below our estimate, but a higher gross margin, and higher contributions from associates mitigated the shortfall in earnings. Compared with a year ago, revenue was up slightly while gross profit was up 18%. The gross margin expanded nearly 500 basis points, from 33% to 38%, higher than the historical norm.

COLI recorded HKD 301 billion in contracted sales, up nearly 30% year on year. ASP growth was strong at 18%, likely to be supportive of strong margin into 2019. Deposits from presales grew 19% to HKD 93 billion, on the account of the combination of strong contract sales but slower booking during the year. Continuing the sales trend, the company reported contract sales of HKD 50 billion through February 2019, up 18% year on year, attributed to strong price growth with steady volume. This is a strong performance relative to peers.

During the period, the company acquired a land bank of 17.6 million square meters, similar to the pace seen a year ago. The company is committed to the continued expansion of operational scale, with new starts targeted up 9% year on year, on the back of more than doubling a year ago.

Management guided sales target of HKD 350 billion for 2019, up 16% year on year. This is in line with the stated target of HKD 400 billion by 2020.

For the year, the effective interest rate was 4.6%, in line with the historical norm. The company continues to enjoy the lowest borrowing cost in the sector. The dividend payout ratio was 27% based on core earnings, slightly higher than that seen a year ago. The company ended the year with net gearing of 34% compared with 28% at interim and a year ago, attributed to the higher capital expenditure necessary to increase the land bank and GFA starts.

While the results were a miss, management seems to convey confidence through strong dividend growth, expanding operational scale and unchanged sales target. We project average annual earnings growth of 25% over the next two year.