• 1H18 within expectations
• Still some uncertainty over backdoor listing
• Higher FV of HK$26.84

No Surprises Here

China Evergrande (3333 HK; Evergrande) saw 1H18 revenue rise 59.8% YoY to RMB 300.3b, mainly due to a 61.8% YoY increase in recognized sales area, making up for the 0.6% YoY drop in ASP. 1H18 gross profit rose 61.8% YoY to RMB 108.9b, resulting in gross profit inching up by 0.4 ppts to 36.2%. All-in, 1H18 net profit increased 129.3% YoY to RMB 53.0b, while core profit increased by 101.5% to RMB 55.0b.

This set of results does not come as a surprise, given that the group had already issued a positive profit alert previously with similar guidance. In terms of contracted sales, the group has already achieved 63% of its 2018 target of RMB 550.0b by July 2018.

Dividend Declared for FY16 and 17 Only

The group did not declare any dividend for 1H18, while a final dividend for both 2016 and 2017 of RMB 1.13 per share was announced recently. In our view, this payout is now possible, given that the group’s restructuring for the proposed Ashare backdoor listing has now been delayed.

On a normalized basis, we expect Evergrande’s dividends to be based on a 50% payout ratio, just like what it was previously. Given the market volatility in the A-share market, we believe that while management is in close talks with the authorities, it is unlikely that the backdoor listing would take place anytime soon.

Encouraging Efforts at Deleveraging

On leverage, the group has managed to reduce its net gearing ratio from 183.7% as of end-FY17 to 127.3% as of end-1H18, and is looking to bring this down to 100% and 70% by end-2019 and 2020, respectively.

Looking forward, management believes that the prospects for tier- 1 and 2 cities remain bright, but will seek to avoid tier 4 cities in its land bank acquisitions.

We peg Evergrande’s valuation to a 10% discount off its 5-year forward P/E mean of 8.2x, thus revising our fair value upwards from HK$20.72 to HK$26.84.

Source: OCBC Research - 29 Aug 2018