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Morningstar | Shimao Property's Interim Results in Line, Strong Contract Sales Expected for Full Year

Shimao reported interim 2018 results was in line with our estimate. Revenue and core attributable profit were CNY 43 billion and CNY 4.4 billion, respectively, up 19% and 20% year on year. Gross margin improved to 31% from 30% as expected. Earnings per share were CNY 1.266, up 10% year on year. The company declared an interim dividend of HKD 0.50 per share, up 25% year on year. The top line and core earnings accounted for 49% and 48% of our projection, the run rate is about the same as that seen a year ago. We maintain our fair value estimate of HKD 25 and the company's no-moat rating.

Property development accounted for 96% of total revenue. The company booked revenue totaling CNY 41 billion, up 19% year on year. Average booked price was CNY 12,740, down 6% year on year. The company attributed the ASP decline to the fact that completions were tilted toward lower-tier cities during the half. It expects booked ASP for the full year to exceed the level see in 2017. Year through July, contract sales totaled CNY 85 billion, up 60% year on year, attributed to volume growth of 66% and small price decline. The run rate is about 61% to the company's full-year target of CNY 140 billion. Contract sale to date has greatly exceeded the company's projection at the beginning of the year. The company is likely to hit CNY 150 billion for the year on account of sellable resources totaling nearly 11 million square meters (estimated to be CNY 172 billion) during the second half.

During the period, gross floor area, or GFA, completion was on track with 4 million square meters. Combined with a guidance of 5 million for the second half, full-year GFA completion should total 9 million square meters, or 18% higher than 2017. However, new starts only reached 8 million square meters. Coupled with a guidance of 11 million for the second half, the total for the year is expected to be below the company's earlier guidance of 30 million square meters for the full year.

Land banking has been brisk during the first half. The company acquired land reserves of 7.7 million square meters, with a total land bank of 52 million square meters Compared with 2017, the company acquired 11 million square meters and a land bank of 48 million square meters. A larger operational scale pushed net gearing to 63%, up from 61% seen at year-end.

The company's sales performance has outpaced most of the sector peers so far this year. With the strong momentum and the expansion of its operation, we expect the company to book strong earnings growth for 2018 and 2019. However, as the property market is near the tail end of a growth cycle, along with the company's relative high gearing level, we expect the company to revert to a slow pace of growth after 2019.