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Morningstar | China Vanke's 1Q Earnings Slightly Below Expectations due to Large Minority Interest

China Vanke reported first-quarter results slightly below our projection as earnings growth lagged behind the top line. Revenue and attributable net income were CNY 48 billion and CNY 1.1 billion, respectively, up 59% and 25% year on year, driven by expected higher completions. Gross margin for the quarter was at 35% versus 33% a year ago, but in line with the margin seen for full-year 2018. EPS came to CNY 0.102, up 25% year on year. Revenue and net profit for the quarter accounted for 12% and 3% of our full-year target, respectively, similar to the run rate seen in prior years. The smaller growth in attributable net profit relative to the top-line increase was due to a higher share of minority interest which took up two thirds of the earnings. As first-quarter net income typically only accounts for a small percentage of full-year earnings, we retain our fair value estimate of HKD 38 (CNY 30) and our no-moat rating.

The company achieved contracted sales of CNY 149 billion and gross floor area sold of 9.2 million square meters, down 3% and 12% year on year. The average selling price for the period was CNY 16,159 per square meter, up 10% from the year-ago period. The pace of contract sales reflected a slowing broader market. For comparison, sales of commodity residential housing for the whole country were down 0.6% and up 7.6%, continuing the slowing trend from 2018. For the full year, we expect price growth to continue to slow, converging with the weak volume trend.

The company’s gearing at the end of the period was at 44%, versus 31% at year-end 2018, attributed to an increase in GFA starts and area under construction, coupled with slowing contract sales. We expect gearing to ease off going forward, given slower land acquisition as well as the H-share placement completed after quarter-end.

During the quarter, property development accounted for 94% of the company’s total revenue. The company booked GFA of 3.11 million square meters and revenue of CNY 45.6 billion, up 88% and 67% year on year, respectively. The average booked price was CNY 14,669 per square meter, down 12% year on year. The company completed floor area of 2.23 million square meter, or 7% of the planned completion for the year. As property development revenue is usually correlated with GFA completion, the revenue run rate is likely in line. Further, the area sold but not booked grew to 40 million square meters and CNY 586 billion, up near 20% from the end of the year, and higher than full-year 2019 projected revenue.