• FY17 earnings above estimates
• Land bank acquisitions should slow down
• Not quite a bargain at current valuations

Positive Takeaways From FY17

China Evergrande’s (3333 HK) FY17 revenue grew 47.1% to RMB 311.0b, but missed ours as well as the street’s estimates by 19.5% and 14.1%, respectively. However, we note that the group registered strong growth in gross profit margins (2017: 36.1%, 2016: 28.1%), which is consequent to the low cost of its large land bank that was amassed previously. Furthermore, we note that the group has exhibited good cost control, with the SG&A to contracted sales ratio dropping from 6.9% in FY16 to 5.9% in FY17.

All-in, core profit grew 94.7% to RMB 40.5b, surpassing our forecast by ~9.7%. We note that tier-3 cities comprise ~42% of the group’s newly-acquired land bank in 2017, and we believe that the motivation behind this would be to participate in any spill-over effect arising from the tighter property conditions in the tier-1 and key tier-2 cities.

Focus on Deleveraging

While the group’s land reserves has increased 36.2% to 312m sqm as at end-2017, we believe that this growth should start to slow down as it should have sufficient saleable resources to hit its RMB 800b contracted sales target by 2020, coupled with its focus on deleveraging. To this end, the group has registered a net gearing ratio of 184%, and should look to better this ratio by the end of this year. While encouraging, we adopt a more cautious approach, given that the group still has some distance to cover before bringing its gearing levels to be in-line with its peers.

Fully Valued

China Evergrande is currently trading at 7.4x FY18F P/E, which is a shade under that of its listed peers (Country Garden: 8.2x; China Vanke: 8.4x). We believe that this is justified, given that China Evergrande’s balance sheet is relatively more stretched. Nonetheless, we deem the proposed A-share backdoor listing to be a key catalyst, though the timing of this is still uncertain at this juncture.

After incorporating more conservative assumptions, as well as a lower target P/E of 7.5x into our forecast, our fair value estimate dips from HK$28.64 to HK$25.29.

Source: OCBC Research - 27 Mar 2018