EUR 850.00 For Business Accounts Only

Morningstar | Full-Year Results In Line, but Slowing Property Market and New Businesses Heighten Volatility

China Evergrande Group, or Evergrande’s, full-year 2018 results were slightly above our estimate. The company reported net profit excluding exchange losses of CNY 72 billion. Excluding revaluation gain, we estimated core net profit of CNY 71 billion. With the strategic investors’ injection of capital into the company’s onshore entity, the minority shareholders are entitled to approximately one third of the earnings during the year. Accounting for this, the core profit attributable is CNY 45 billion or 3% above our estimate. The company declared no dividend for the year due to the ongoing reorganization plan. We rolled our model forward and increased our margin assumption slightly. We raise our fair value estimate from HKD 21 to HKD 24. We maintain the firm’s no-moat rating. Given the company’s historical earnings volatility, financial leverage and ongoing investment in new businesses, we stress a wide margin of safety when investing in this stock.

The booked revenue and gross profit totaled CNY 466 billion and CNY 169 billion, both up 50% year on year. The booked amount was slightly lower than we projected, and gross margin was steady. The company’s portfolio, heavily tilted toward lower-tier cities, fared well in 2018 with steady prices. These cities enjoyed strong price growth in 2017 because of spillover demand diverting from higher-tier cities under restrictive government policy and low inventory levels. During the year, the company recorded CNY 551 billion in contracted sales, up 10% year on year. After several years of strong sales growth, the pace tapered off. The company guided a 2019 target of CNY 600 billion, up 10% year on year. In 2019, through February, contract sales slowed and were down more than 40% so far.

The balance sheet continued to improve. Net gearing was at 176% at the end of the year, compared with 240% a year ago. The lower gearing was partially attributed to slower land bank expansion, relative to the pace of contract sales.

During the period, the company acquired land reserve of 50 million square meters, compared with 126 million square meters and 102 million meters during 2017 and 2016. The land bank totaled 303 million square meters at the end of the period. We expect the gearing to continue to decline over the next few years as the company enters a period of slower growth. The effective interest rate for the year was 8.2%, lower than the more than 9% average in the last few years.
Operationally, the full-year results were within expectations. The property development segment is performing well with steady margins. Further margin expansion is unlikely given the large ASP increase over the last few years. But, given the steady contract sales price in 2018, we expect the margins to hold for 2019. The company’s diversification effort into non-real estate businesses is likely to be capital intensive. While the new businesses will only slow the deleveraging effort marginally, they will heighten earnings volatility. A slow down in the property sector may affect the company’s ability to continue to invest in these businesses.
The company has made progress with the reorganization through an onshore listing of its real estate assets. The proposal is now pending CSRC approval. Management did not provide an update on the timing.