Summary

-In 2015H1, benefiting from increased deliverable GFAs, the reported revenue of China Overseas Land (COLI) increased by 19.5% yoy to HKD64.9 billion while its core net profit increased by 20% yoy to HKD13.6 billion. It gross margin was stable at 32%. In H1, revenue from property rental grew by 23% yoy to HKD920 million, mainly driven by increases in rents and occupancy rates. Profit from property rental reached HKD4.26 billion, which included the gain of HKD3.55 billion arising from changes in fair value of investment properties. The core profit of its rental business was HKD710 million, which increased by 16% yoy. Besides, revenue from other operations grew by 32% yoy to HKD1.38 billion, which was mainly generated from the property management business.

-In the first 7 months of 2015, contracted sales of COLI recorded an increase of 16.4% yoy to HKD95.9 billion. Contracted GFAs increased by 29.61% yoy to 6.57 million sq. m. We expect property sales to reach HKD1.1 billion in August, bringing cumulative sales value to HKD107 billion for the first 8 months, which will account for around 60% of its new sales target (HKD180 billion).

-In the coming 4 months, COLI needs to complete a sales target of HKD72 billion, which is equivalent to HKD18 billion per month. Given the traditional peak season of property sales from September to November and that the company has a strong project pipeline for sale, the sales performance of the company in the coming months is worth expecting.

-As of June, the bank balances and cash of COLI amounted to HKD78.6 billion, of which Hong Kong Dollar, Canadian Dollar and Renminbi accounted for 27%, 3.8% and 69% respectively. Interest bearing debts amounted to HKD103.7 billion, of which Hong Kong Dollar, US Dollar and Renminbi accounted for 32%, 46% and 19% respectively. Total net debts amounted to HKD23.1 billion and net gearing dropped from 28% in 2014 to 13.4%, due to more debt having matured in H1, higher cash collection from property sales and lower capex (In 2015H1, additional capex on land acquisitions of the company was just RMB8.3 billion, vs RMB24.5 billion in 2014H1).

-As for the impact of a devaluation in RMB on the fundamental aspects of the company, we expect that the negative impact to be smaller than market expected. Although the company has the largest foreign exchange exposure through its debts (its USD and HKD-denominated debts account for 81% of its total debts, which amount to HKD85 billion), considering the company is holding cash in foreign currency and with an asset size of over HKD50 billion, the actual translation loss of its foreign currency debt exposure is estimated to be around HKD30-50 billion. Besides, this belongs to a long-term foreign currency exposure and spot exposure is limited. As a result, under a scenario of RMB depreciating by 3% per year from 2015-2017, the impact of foreign exchange loss on earnings during the corresponding fiscal years will only be around 5%. Moreover, the dual funding platforms of COLI will also help reduce earnings volatility brought by changes in exchange rates.

-Amid the weak economy, it is quite exceptional for COLI to deliver a solid interim result. In H2, the positive catalysts of the fundamental aspects of the company include a smooth progress in property sales, sales target to be achieved earlier than expected, replenishment of its land bank at lower costs and refinancing of its foreign debts to reduce the negative impact from the devaluation of RMB. Overall speaking, we are cautiously optimistic about the macro environment and the domestic property market, although the overall valuations of the property stocks are already at a relatively low level. We grant an “Neutral” recommendation to COLI, with a 12-month target price of HKD20.8, which is equivalent to 6x and 5.4x of its prospective 2015/2016 PE. (Closing price as at 8 Sep, 2015)

Financials

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