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Morningstar | Poly Developments and Holdings' Balance Sheet Strengthened Slightly; FVE Unchanged

Poly Developments and Holdings, recently renamed from Poly Real Estate Group, reported year-to-September revenue and earnings of CNY 95 billion and CNY 9.6 billion, respectively. The top line was up 26% year on year, while earnings were up 16%. This smaller growth in earnings was due to a bigger share of minority interest as the company undertook more joint ventures during the year to scale up its operation. Strong contract sales and joint venture structures have allowed the company to strengthen the balance sheet slightly despite an enlarged operation. The share price has pulled back during the year, and we believe the shares are now fairly valued at this point. We maintain our fair value estimate of CNY 13, along with our no-moat rating for the company.

Nine-month revenue accounted for 48% of our full-year estimate, a slightly lower run rate than a year ago. Gross margin was at 33%, up slightly from a year ago and slightly ahead of our expectation. Attributable earnings account for 51% of our full-year projection, a little behind the run rate seen a year ago. The concern is that minority interests accounted for nearly 30% of the nine-month earnings, compared with 20% a year ago.

During the period, the company acquired 108 projects with gross floor area, or GFA, of 25 million square meters, compared with a land bank of 500 projects and 125 million square meters at year-end 2017. New starts, completions, and area under construction are up 84%, 9% and 47% year on year, respectively. Despite scaling up the operation, the balance sheet was under control. Net gearing eased off to 82%, compared with 86% seen at year-end, excluding the perpetual securities. This was largely due to strong contract sales and cash collection somewhat lessening the concern of another equity placement.

Contract sales for the period were CNY 304 billion and GFA 20 million square meters, up 43% and 35% year on year. The run rate is about 78% to its full-year target, faster than a year ago. The contract sales pace is impressive relative to its peers, considering the overall market has continued to slow this year, logging 3% and 13% increases in volume and price, respectively. It looks feasible for the company to achieve its target of CNY 500 billion by 2020, implying a low to mid teen growth for the next two years. But, it is still unclear how much that growth will translate into growth in attributable earnings.