China Overseas Land & Investment Earnings: Solid Profit Growth Reaffirms Our Positive View

China Overseas Land & Investment’s, 00688 or COLI’s, third-quarter 2023 revenue and recurring operating profit jumped 61% and 96% year on year, respectively. This implies a pickup in operating margin to 12.5% for the third quarter from 10.3% a year ago. We think COLI’s top line benefited from a low base and normalized delivery, and we remain upbeat on its earnings recovery given more margin-accretive projects and cost initiatives. Moreover, a 30% sales increase (excluding associates and joint ventures) in September 2023 versus the same month last year reassures us that COLI could achieve the 20% sales growth target for full-year 2023. While we raise our 2023 revenue and operating profit assumptions by a respective 2% and 3%, we keep our fair value estimate for COLI at HKD 26 as our long-run profit forecast remains unchanged. Despite weak confidence in China’s real estate sector, we view COLI’s risk-return profile as attractive to long-term investors. Moving forward, we expect the company to outperform most China real estate developers on sales and earnings growth.

Although COLI and its subsidiaries jointly posted a 17% year-on-year sales decline for the third quarter of 2023, it fared better than the 32% drop of China’s top 100 developers for the same period. This can be ascribed to COLI’s stronger reputation, higher quality landbank and healthier balance sheet, in our view. Notably, COLI accelerated land acquisition in wealthy cities in the third quarter of 2023 with an over CNY 30 billion attributable land premium, close to the total amount spent in the first half. As such, we think the company is on track to meet its goal of a double-digit land premium growth for 2023. Looking through the current market cycle, we expect ongoing policy easing and prime landbank purchasing in higher-tier cities to further underpin COLI’s property sales and profit margins.