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Morningstar | China Resources Full-Year Result a Miss on Low Top Line, but Strong Margin and Management Confidence

China Resources Land reported full-year 2018 results with core profit attributable to shareholders of CNY 19.3 billion, up 18% year on year. Earnings came in 8% below our estimate. The company declared a full-year dividend of CNY 1.059 per share, up 28% year on year. Revenue and gross profit totaled CNY 121 billion and CNY 53 billion, respectively, up 19% and 28% year on year. Gross margin improved to 43% from 40% seen a year ago. The earnings miss was attributed to lower top line, with higher margin on development properties mitigating some of the shortfall. Further, management seems to convey confidence with the dividend hike and distancing away from equity issuance. We maintain our fair value estimate of HKD 33 and our no-moat rating.

On the property development side, the company saw revenue and gross profit of CNY 105 billion and CNY 45 billion, respectively, up by 18% and 27% year on year. Gross margin expanded from near 40% to 43%. Booked gross floor area, or GFA, totaled 6.1 million square meters, down 16% compared with a year ago. Contracted sales for the year were CNY 211 billion, up 22% year on year, exceeding the full-year target of CNY 200 billion. GFA sold totaled 12 million square meters, up 18% year on year. At year-end, the company has sold but not booked contracted sales of CNY 187 billion, with CNY 99 billion scheduled to be recognized in 2019, or two thirds of the projected full-year revenue. Sales in 2019 seemed to be off to a quick start, with sales up 35% year through February.

Investment properties saw revenue and gross profit of CNY 9.5 billion and CNY 6.3 billion, respectively, up 25% and 34% year on year. Gross margin expanded strongly to 66% from 61%.

Retail assets, the most important segment, saw rental revenue of CNY 6.8 billion, up 37% year on year, boosted by the opening of eight new MIXc during the year. Mature malls (those opened before 2014) saw rental revenue up 14. % The company’s retail portfolio achieved retail sales of CNY 47 billion, up 32% year on year.

Net gearing was 34% at the end of the year, dipping slightly from a year ago, despite aggressive landbank acquisitions during the year. For 2018, land acquisitions totaled 22 million square meters and CNY 151 billion, nearly double the floor space acquired in the year before. Land bank turnover was near four years, indicating strong operational improvement over the past two years, but also making further improvement unlikely.
The dividend payout ratio was at 38% of core earnings, steadily marching upward from the mid-20s a few years ago. While we believe the balance sheet may become stretched, with net gearing rising above 50% in 2019, the management has indicated that the company will not engage in equity financing in the near term.