EUR 850.00 For Business Accounts Only

Morningstar | Poly Real Estate Balance Sheet Looked Stretched After 1H 2018

Poly Real Estate Group released updated first-half results which are largely unchanged from the preliminary results. Revenue and attributable earnings were CNY 60 billion and CNY 6.5 billion, respectively. The top line was up 9% and core earnings were up 15%, compared with the same period a year ago. The stronger growth in earnings was attributed to improved gross margin. We estimate full-year earnings per share of CNY 1.58 and CNY 1.92 for 2018 and 2019, respectively. The share price has pulled back during the year, and is now trading at 7 times the projected 2018 earnings. We believe the shares are now undervalued at this point but would require a greater margin of safety given the company's business volatility.

We maintain our fair value estimate of CNY 13, along with our no-moat rating for the company.

First-half revenue and core earnings accounted for 30% and 35% of our full-year estimate. While the run rate was slower compared with a year ago, the slower pace of booking is mitigated by strong contract sales for the first half. Further, margin expansion should hold for the full year, supporting the earnings growth. Contract sales totaled CNY 215 billion and GFA 14.5 million square meters, up 47% and 38% year on year. The run rate is about 57% of the company's full-year target, faster than the pace seen a year ago. The contract sales pace is impressive relative to most of its peers, as the overall market has continued to slow, with volume up 3% and value up 15% so far this year.

The company added land bank of 15 million square meters with land premium of CNY 107 billion. The acquisitions are focused on tier one and tier two cities, accounting for 68% and 50% by value and GFA. Compared with full-year 2017, the land acquisition is slower, at less than one third of the pace. To maintain growth, the company needs to step up its land banking effort, especially considering the contract sales pace as well as higher new starts during the first half.

An area of concern is the company’s now-stretched balance sheet, given its ambitious contract sales target of CNY 500 billion by 2020. Net gearing rose to 93% at the end of the period, up from 86% seen at year-end. Net gearing would be 99% if perpetual securities are included as debt. We believe the company is likely to embark on another portfolio acquisition, funded by equity issuance.