COLI Earnings: Solid First Quarter, but We Expect Moderation Given Weak Presale; Shares Still Cheap

No-moat China Overseas Land & Investment posted strong first-quarter 2024 preliminary numbers as revenue and operating profit—excluding foreign exchange effect—both saw double-digit year-on-year growth. While we view this as a continuation of the strong momentum for 2023, we maintain our forecast of a low-single-digit contraction for 2024 revenue due to weak presale since second-half 2023. Operating margin also pulled back to 18.2% for the first quarter from 20.8% a year ago, which we ascribe to more suppressed gross margins of projects delivered. As home price weakness will likely persist, we lower our 2024 operating margin assumption by 40 basis points to 17.5%, but we still expect a secular improvement to 19.5% in 2028 given a higher mix of landbank in wealthy cities. Our 2024-26 earnings and midcycle forecasts are largely unchanged, and we keep our fair value estimate for COLI at HKD 21.00 per share, suggesting a significant upside despite the recent runup. COLI is still our China real estate sector top pick, as we believe that investors underappreciate its profitability rebound potential and its sound financial health.