• RMB 600b FY19 target
• Still awaiting A-share developments
• FV of HK$26.10

Results a Beat

China Evergrande’s (3333 HK; Evergrande) results came in above our expectations. Revenue rose by 49.9% to RMB 446.2b for FY18, on the back of a 50.7% increase in delivered GFA, while ASP remained stable. Revenue also increased in the group’s property management and investment properties, but their contribution to top-line is still not significant at this stage. The group’s gross profit margin remained relatively stable at 36.2%. Core PATMI came in at RMB 49.2b, or 114.6% of our full-year forecast.

The group brought its net gearing ratio down from 183.7% as of end-Dec’17 to 151.9% as of endDec’18. Evergrande has declared that no dividend will be made for FY18 at this juncture, which is in-line with the dividend uncertainty that we highlighted in our last report, arising from the reorganization of Shenzhen Real Estate. We note that the Board will be meeting in July 2019 to evaluate the payment of a final dividend for 2018; assuming a 50% payout ratio being observed, this comes up to ~RMB 1.42/share.

Targeting 8.8% Growth in Contracted Sales

The group has set itself a contracted sales target of RMB 600b for 2019, which represents a 8.8% increase. This growth is a shade lower than the 10.1% contracted sales growth achieved in 2018. Management continues to guide for a reduction in net gearing from its last reported 151.9% to an industry-average level by 2020. Thus, we expect the group to slow down its landbanking activities, to the extent that its overall land reserves (currently at 303m sqm) should be stable in the near future.

Improving Land Cost

Unlike its peers, Evergrande’s average land cost appears to be coming down, from RMB 1,683 psm as of 1H18 to RMB 1,635 psm as of 2H18. As we understand, this is on the back of M&A activity as well as negotiations with the government when acquiring land. We acknowledge the improving balance sheet situation, as well as the possible re-rating should the A-share backdoor listing come to pass. However, we adopt a more conservative stance for now, with our 5.8x FY19F P/E peg, while our FV rises from HK$24.28 to HK$26.10. Maintain HOLD.

Source: OCBC Research - 29 Mar 2019