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Morningstar | China Vanke Full-Year Results a Miss on Lower Top Line, but Strong Margin Provides Mitigation

China Vanke reported full-year 2018 results that were below our estimate. Revenue and net profit were CNY 297 billion and CNY 33.7 billion, respectively, up 25% and 20% year on year. Development margin expanded to 37%, a record high for the company, reflecting the rising average selling price in 2017. Earnings per share came in at CNY 3.06, up 20% year on year. The company declared an annual dividend of CNY 1.07 per share, up 19% year on year. The top line was 15% below our estimate, but earnings were 7% below, on account of better than expected margin. While the booking was slower than expected, strong margin, and higher amount of area sold but not booked, should bode well for future earnings growth. We maintain our fair value estimate of HKD 38/CNY 30, reflecting strong margin and growth potential despite the topline miss. We maintain the company’s no-moat rating.

Property development accounted for 96% of total revenue. The company booked gross floor area, or GFA, of 21.9 million square meters and revenue of CNY 284 billion, down 11% and up 25% year on year, respectively. Average booked price was CNY 12,961, up 14% year on year. Area sold but not booked grew significantly, up 28% from the end of 2017, and now standing at 37 million square meters and CNY 531 billion, providing high earnings visibility for 2019.

During 2018, the property market in China decelerated under the weight of government policies. For the year, sales of commodity housing were up 1.3% and 12% by GFA and value, respectively, compared with growth rates of 8% and 14% in 2017, and 22% and 36% in 2016. In comparison, China Vanke’s contracted sales were up 12% and 15% by GFA and value, respectively. The company’s sales now account for slightly over 4% of total commodity sales, up from 4% and 3.1% for 2017 and 2016, respectively.

The full-year completion for the company was 27.6 million square meters, meeting the target of 26 million set at the beginning of the year. While the completion for 2018 was 20% higher year on year, booked floor space were only up 11%, attributing the increase in unbooked sales. New construction starts reached 50 million square meters, greatly exceeding the target of 35.5 million square meters for the year. Higher starts may likely boost the contract sales pace during second half of 2019.
Land bank acquisitions were modest during the year, totaled 25 million square meters, slightly lower than that from a year ago. The land bank stands at only 93 million square meters versus contracted sales of 40 million square meters, a very fast asset turn. We expect higher asset turn to slow as the market cools. The company will likely need to acquire more land in order to sustain a moderate amount of sales growth, resulting in higher gearing.
The effective interest rate for the period jumped up to 6.2% after near 5% rate over the past two years, likely due to higher proportion of non-bank borrowings. The company’s gearing at the end of the period was 36%, compared with 37% and 14% at interim and a year ago, respectively. The higher gearing reflected the completion of the GLP acquisition earlier in the year.
The management did not give update on the proposed H-share issuance. That, along with the potential unwinding of Baoneng stake may be an overhang to the share price performance in the near term.