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Morningstar | New Morningstar Analyst Report for China Resources Land

China Resources Land, or CRL, is unique among Chinese real estate developers. Among large-cap developers, CRL is the only one with a credible investment property business. While currently contributing about 10% of operating profit, the company’s two lines of commercial offerings, MixC and Hi5, are projected to double in size and account for 20% of operating profit by the end of the projection period. Riding on the success of the Shenzhen MixC, arguably the most successful commercial project in a highly visible and competitive city, the company aims to transition from a predominantly residential developer into one known for developing and expanding large-scale, mixed-use projects. The residential development business provides the necessary fuel to power this growth. The company has benefited from a nearly annual asset injection from the parent company. During the past decade, asset injections totaled 25 million square meters in gross floor area, or GFA, at an average net asset value, or NAV, discount of 21%. To put the scale of the asset injections in perspective, the company’s contracted sales over the past decade totaled 25.8 million square meters of GFA. The parent company has nearly exhausted its land bank, with only one sizable plot remaining. Asset injections may be coming to an end. The company has some challenges ahead as it wades into the competitive land auction market. While blessed with a high-quality brand name and low funding costs, CRL has traditionally achieved lower gross margin and slower asset turns than its large-scale peers. Despite showing some improvements in recent years, the company still lacks the operational expertise in a fast-turn and asset-light model. Hence, it will likely continue to lag its peers, and will be less favorably positioned to capitalize on the consolidation trend sweeping the industry. The drive to expand the investment property portfolio is likely to stress the balance sheet, leading to further equity issuance.