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Morningstar | Poly Developments Full-Year Results a Slight Beat on Better Margin, Lower Gearing Encouraging. See Updated Analyst Note from 17 Apr 2019

Poly Developments and Holdings Group, or Poly Group released full-year results with revenue and earnings of CNY 195 billion and CNY 18.9 billion, slightly better than the preliminary results announced in January. Relative to our initial projection, full-year results ended with top line 2% below, but earnings 1% higher, owing to better margin and higher contributions from associates. Full-year dividend was CNY 0.50 per share, up 25% from a year ago. As of year-end, the company has over 600 projects with a land bank of 195 million square meters, continuing the growth in operational scale seen during the past two years. Part of the growth was driven by higher number of joint ventures. Along with modest land bank acquisitions, balance sheet was slightly strengthened with lower gearing.

We adjusted our fair value estimate to CNY 15 from CNY 13 to account for better margin and the time value of money. We maintain our no-moat rating for the company, and view shares as fairly valued at this point.

Full-year revenue was CNY 195 billion, 2% below our initial estimate. Operating margin was 200 basis points higher than a year ago, better than expected. Combined with higher contributions from associates, but also weighed down by a loss reserve of CNY 2 billion, resulted in earnings totaling CNY 18.9 billion, slightly higher than our initial projection of CNY 18.7 billion. More importantly, earnings were up 21% from a year ago, continuing the growth trend started in 2017, alleviating the market’s concern over largely flat earnings from 2014 to 2016. Total assets were in line with our projection, resulting in net gearing easing a bit to 81% from 86%. Including perpetual securities are included as debt, net gearing was 87% versus 93% a year ago. Dividend payout was at 31%, steady from years in the past.

Contract sales for the year were CNY 405 billion, up 31% year on year, mostly driven by a 23% increase in gross floor area sold. This is a strong performance relative to other large developers. Land acquisitions were slower during the year. The company acquired 31 million square meters for CNY 192 billion, comparing 45 million square meters and CNY 277 billion a year ago. With the robust contract sales in 2018, the company only needs modest single-digit CAGR over the next two years to reach its stated CNY 500 billion target by 2020.
As part of the reorganization, the company acquired a 50% stake in Poly Holdings, the entity with a controlling stake of 40% in Hong Kong listed Poly Property. We expect the company to the main driver of on-shore property development projects for the group, while Poly Property to focus on Hong Kong. The reorganization should solidify the overall strategy and avoid competition between sister companies.