Morningstar | Upgrading China Resources Land FVE on Strong Year-to-Date Contract Sales
We are upgrading our fair value estimate for China Resources Land as a result of the company's strong sales for the year to date. The strong performance was driven by healthy growth in both sales volume and average selling prices. As the upper-tier cities are mostly seeing capped prices and lower sales volume under the effect of government policy and low inventory level, this represents very good performance, given the company's large exposure to these cities. We change our fair value estimate to HKD 33 per share from HKD 30, and we maintain our no-moat rating. Our updated fair value estimate represents 9 times projected earnings and 1.4 times book value. The recent pullback in the share price represents a good entry point for investors.For the year to date, the company achieved contract sales of CNY 94 billion, up 49% year on year. The increase was attributed to a 31% increase in volume and a 14% increase in average selling prices. We adjusted our full-year contract sales to CNY 195 billion, slightly ahead of the company’s target of CNY 185 billion. On the revenue booking side, we increased gross margin from 38% to 40% for 2018 and 2019. We also increased our assumption for the land appreciation tax, reflecting the increase of average selling prices in 2017 and year to date in 2018. These adjustments resulted in our earnings estimate increasing by 6% and 8% for 2018 and 2019, respectively.
Land acquisitions totaled 8.2 million square meters with a premium of CNY 67 billion. This is roughly the same pace as last year at a similar accommodation value. In order to support the quicker pace of contract sales over the next two years, we expect more land acquisitions during the second half of the year, likely pushing gearing above 50% by year-end.
On the investment property side, for first half of 2018, the company achieved rental income of HKD 4.4 billion, up 26% year on year, compared with an increase of 17% in 2017. The increase was driven by 14% positive rental reversion, and the rest due to newly opened malls. The company reported tenant sales growth of 30%. This should support further positive rental reversion for the full year, as the occupancy cost ratio is at a reasonable level of 14%.
China Resources Land is an investment holding company. Through its subsidiaries, Co. is engaged in the development and sales of developed properties, property investments and management, hotel operations and the provision of construction, decoration and other property development related services in the People's Republic of China. As of Dec 31 2014, Co. operated in four segments: sale of developed properties, property investments and management, hotel operations, and construction, decoration services and others.
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