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Morningstar | China Vanke Interim Results in Line With Improving Margin and Adequate Run Rate to Full-Year Target

China Vanke reported interim 2018 results in line with our estimate. Revenue and net profit were CNY 105 billion and CNY 9 billion, respectively, up 55% and 25% year on year. Gross margin continued to expand and reached 34%, versus 32% and 30% seen at end of last year and last interim, reflecting higher average selling prices throughout 2017. Earnings per share came in at CNY 0.83, up 26% year on year. The company declared no dividend for the interim, the same as a year ago. The interim top line and earnings accounted for 29% and 24% of our full-year estimate, respectively. Given the large amount of sold and booked at the end of the period and the on-track completion target, we expect the company to meet our full-year projection. We retain our fair value estimate of HKD 38 (CNY 30) and no-moat rating.

Property development accounted for 95% of total revenue. The company booked gross floor area, or GFA, of 7 million square meters and revenue of CNY 100 billion, up 20% and 57% year on year, respectively. Average booked price was CNY 14,350, up 28% year on year. Area sold but not booked grew significantly, up 25% from the end of 2016, and now stands at 37 million square meters and CNY 520 billion, providing high earnings visibility for the rest of the year.

During first-half 2018, the property market in China, while still in positive territory, slowed further. Sales of commodity housing were up 3% and 15% by GFA and value, respectively, compared with growth rates of 14% and 18% a year ago. In comparison, China Vanke's contracted sales were up 9% and 10% by GFA and value, respectively. The company's sales now account for 4.6% of total commodity sales, up from 4.0% and 3.1% at the end of 2017 and 2016, respectively. The half-year completion was 9 million square meters or 35% of the full-year target. New construction reached 23 million, or 65% of the full-year target.

Cash generating from operations totaled CNY 20 billion, down 50% from a year ago. The decrease was attributed to higher inventory and receivables slightly outpacing the growth in receipts in advance.

The effective interest rate for the period declined to 2.7% from 5.0% seen at the end of 2017, due to recent issuances of short-term notes carrying lower rates. We expect effective interest rate to revert to normalized level for the full year. At this point, short-term borrowings accounted for 27% of the interest-bearing liabilities. But foreign currency liabilities accounted for 32%, exposing the company to the risk of further CNY depreciation.
The land bank stands at 91 million square meters, implying a very fast asset turnover. During the period, the company acquired attributable GFA of 11 million square meters for CNY 58 billion. The pace seemed to be slow, compared with 28 million square meters for CNY 219 billion during full-year 2017. We expect the company to replenish the land bank more aggressively in the second half of the year. The company's gearing at the end of the period was 37%, compared with 14% at year-end. The gearing rose higher on the account of the GLP acquisition which was completed in January 2018. Gearing should fall lower by the end of the year, given the lower land bank acquisition cost so far.