EUR 850.00 For Business Accounts Only

Morningstar | China Resources Land's Strong Interim Results Driven by Great Margin on Development Properties

China Resources Land reported interim 2018 results with core profit attributable to shareholders of CNY 7.3 billion, up 152% year on year. This is about 28% of our full-year estimate. Revenue was CNY 31 billion, up 40% year on year. Aggregate gross margin jumped to 48%, up from 35% seen the same period last year. The company declared an interim dividend of CNY 0.11 per share, up 30% year on year. The margin improvement was outstanding, attributed to higher ASP of development properties. Net gearing rose higher to 52%, the highest since 2011. The company showed strong operational results, but the balance sheet is getting more stretched. We maintain our no-moat rating for China Resources Land, along with our fair value estimate of HKD 33.

On the property development side, the company saw revenue and gross profit of CNY 36 billion and CNY 18 billion, up 43% and 112% year on year, respectively. Gross margin expanded from 33% to 49%. Contracted sales in the first half of the year totaled CNY 94 billion, up 36% year on year. The run rate is slightly more than 50% of the company's full-year target. Much of the increase was due to gross floor area, or GFA, sold, higher by 26%, while ASP was up moderately. Booked revenue in the first half accounted for 29% of our full-year estimate, compared with 26% from a year ago. Combined with sold but not booked contracted sales of CNY 149 billion at the end of the period, there is good earning visibility to our full-year revenue estimate. Booked GFA accounts for 21% of the planned total for the year, coupled with the increase in ASP seen during 2017, the company’s property development earnings will be on track for the full year, despite the apparent slow run rate at the interim.

Investment properties saw revenue of CNY 4.4 billion, up 22% year on year, or 42% of our full-year projection. Gross margin rose to 67% from 64%. Gross profit totaled CNY 2.9 billion, up 28% year on year.

For retail assets, the most important segment, mature malls saw rental income and retail sales up 10% and 13% year on year, while new malls saw rental income and retail sales up 70% and 57%. For mature malls, occupancy cost has likely dropped to low teens, boding well for future positive rental reversion.

Land acquisition during the period was more aggressive, totally 8.2 million square meters and CNY 67 billion, about 65% of the full-year acquisition amount in 2017, roughly keeping in line with the still-strong growing pace of contract sales. But the pace is going to slow in the second half on the account of balance sheet leverage.

Finance cost is 35% higher as funding costs rose 25 basis points from last year. The company still has net foreign-currency debt exposure of 22% at end of the period, unchanged from a year ago, but the risk is now heightened by the weakening of the Chinese yuan since the second quarter of the year.

Net gearing rose to 52%, compared with 36% at the end of 2017. But, the company guided gearing to fall to 42% by end of the year. This will be mostly driven by reducing land bank acquisitions during the second half. Also, the dividend payout ratio was 10% of the core earnings, much lower than before, possibly to help with the deleveraging effort.