COLI Earnings: Strong 2023 but Valuation Cut by 19% on Lower Earnings Forecast, Shares Still Cheap

China Overseas Land & Investment, or COLI, ended 2023 with robust revenue and net profit numbers, as both beat Refinitiv consensus. While we view COLI as more resilient than most developer peers, we reduce our fair value estimate to HKD 21.00 per share from HKD 26.00 on more conservative earnings estimates over the next five years. Despite a 12% year-on-year growth in property development revenue for 2023, we think the property sales contraction starting in second-half 2023 will likely linger through 2025 and weigh on COLI’s bookings. Hence, we cut our five-year revenue CAGR assumption to 3.9% from 10.3%. Given our expectation for a slower home price rebound, we also reduce the midcycle gross margin forecast to 22.5% from 24.4%. That said, we think COLI should achieve a faster inventory absorption given strong brand recognition among homebuyers, backed by its sound balance sheet. Our new valuation still sees an 80% upside to COLI’s share price as of March 28, 2024, and the company remains our sector top pick. For the near term, we view the potential turnaround in new home sales in China as a driver for its share price performance.