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Morningstar | In-Line 3Q Results; Vanke Focusing on Digestion for the Rest of the Year

China Vanke reported third-quarter 2018 results that generally tracked the trend seen during interim and in line with our estimates. For the nine-month period, revenue and net profit were CNY 174 billion and CNY 14 billion, respectively, up 55% and 25% year on year. Gross margin continued to expand, reflecting higher average selling prices throughout 2017 and early 2018. Earnings per share came in at CNY 1.27, up 26% year on year. For the period, the top line and earnings accounted for 49% and 37% of our full-year estimate, respectively. The top-line run rate is similar to that seen in previous years, but the bottom line was lower, owing to higher income-tax expenses as well as larger allocation to minority interest. Given the large amount of sold and booked at the end of the period and the strong completion rate, we expect the company to meet our full-year projection; however, margin may come in slightly lower. We retain our fair value estimate of HKD 38 (CNY 30) and our no-moat rating.

Property development accounted for 95% of total revenue. The company booked gross floor area, or GFA, of 12.8 million square meters and revenue of CNY 165 billion, up 33% and 55% year on year, respectively. Average booked price was CNY 13,000, up 17% year on year. Gross margin expanded to above 34%, compared with 32% and 33.7% at year-end 2017 and interim 2018. Area sold but not booked grew to 38 million square meters and CNY 552 billion, up around 30% from the beginning of the year.

The company’s gearing at the end of the period ballooned to 61%, versus 14% and 37% at year-end 2017 and interim 2018, respectively. The stretched balance sheet was attributed to heavy landbank acquisitions of 36 million square meters, compared with 20 million square meters at interim. Further, construction starts were heavy, totaling 36 million square meters, compared with 23 million square meters at interim. Construction starts have now exceeded the company’s full-year target of 35 million square meters. Completions reached 60% of the full-year target, a faster pace than usual.

Meanwhile, the pace of contract sales has been slowing. GFA sold totaled 29 million square meters and CNY 432 billion, both up 9% year on year. The slowing pace and flattening of the average selling price both reflect the trend seen in the broader market, but with capped price growth in upper-tier cities. Sales of commodity residential housing for the whole country were up 3% and 13% by GFA and value, respectively. Compared with a year ago, price growth is still strong, but volume growth has weakened further.

Given the slowing market and the stretched balance sheet, we expect the company to focus on digestion rather than expansion during the fourth quarter. Continued completion and increased booking should allow for higher earnings and lower gearing at year-end. The company will be more restrained in land acquisition and new starts going into the end of the year.