EUR 850.00 For Business Accounts Only

Morningstar | Aggressive Landbanking May Stretch Balance Sheet

We highlighted China Resources Land in our January report "China Real Estate: Quality Retail Properties to Outperform." We view the company as one of the few domestic developers with the expertise and commitment for developing and managing quality retail assets. The company, through a joint venture with two domestic partners, recently acquired a prime commercial lot in Shanghai for CNY 5.8 billion, outbidding two Hong Kong developers, who with their cohorts, have long been dominant in the city’s prime commercial districts. The acquisition demonstrated the company’s increasing profile as a commercial landlord, reflecting its maturing expertise and confidence. However, on the other hand, the company’s balance sheet is under more strain with aggressive land bank acquisitions throughout 2018. We maintain our no-moat rating for China Resources Land, along with our fair value estimate of HKD 33.

For full year 2018, the company achieved contract sales of CNY 211 billion and 12 million square meters. The sales amount was up 38% year on year and exceeded the company’s full year target by 5%. The strong performance was supported by 25% volume growth and 10% price growth. The company maintained an aggressive pace in land acquisitions during the second half of 2018. For the full year, land acquisitions totaled GFA of 22 million square meters with land premium of CNY 146 billion, double of the amount seen during 2017. Net gearing was 52% at interim 2018, up from 36% at end of 2017. We expect gearing to remain north of 50% despite management’s guidance to lower gearing.