Morningstar | Poly Developments 1Q earnings In-Line, Moderate Growth and Continued Deleveraging Ahead
Poly Developments and Holdings Group reported first-quarter revenue and earnings of CNY 22.6 billion and CNY 2.3 billion, respectively. The top line and earnings were up 12% and 23% year on year. The strong earnings growth was mainly due to lower operating expenses. Net gearing was lower for the quarter, reflecting the deleveraging trend seen over the past two years. First-quarter results accounted for 9% and 10% of our full-year revenue and earnings estimates, in line with the run rate seen a year ago. We maintain our fair value estimate of CNY 15, along with our no-moat rating for the company.During the first quarter, gross margin rebounded to 40%, likely because of product mix. We expect full-year margin to converge to 31%, similar to the level seen for full-year 2018. Lower selling, administrative, and other operating expenses were the main reason for higher earnings for the quarter. Minority interest accounted for one third of the total earnings, indicative of the company’s use of partnership at project level to push up its operational scale, which started in 2018. During the quarter, the company acquired 14 projects with gross floor area, or GFA, of 2.8 million square meters, compared with a land bank of 600 projects and 195 million square meters at year-end 2018. New starts, completion, and area under construction are up 51%, 25%, and 39% year on year, respectively. The slower pace of land acquisitions allowed the net gearing to ease off to 70%, compared with 86% at year-end 2018, including perpetual securities as debt.
Contract sales for the quarter were CNY 109.7 billion and GFA 7 million square meters, up 26% and 18% year on year. The contract sales pace is better than its peers, considering the overall market has continued to slow this year with sales value up 5.6% and volume down 0.9%.
Despite the robust contract sales during the first quarter, given the lack of official sales target guidance for the year, we expect full-year growth to be modest. This slower pace of growth should continue to facilitate deleveraging the balance sheet.
Poly Real Estate Group is engaged in the real estate development; leasing of Co.'s developed commodity housing; the design of housing engineering; old building relocation; road and earthwork construction; interior renovation; the installation of air-conditioning project and management; property and hotel management; and trading of wholesale and retail. Through its subsidiaries, Co. is also engaged in the community intellectualization of integrated system engineering; club management; construction supervision; the provision of commercial consultation services; field management; and the sale and agent of real estate.
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