China Vanke: Reinitiating With No Moat and Fair Value of CNY 21; Margins Rebound, but Growth Lags

We reinitiate coverage on China Vanke 000002 with a no-moat rating and a fair value estimate of CNY 21, or HKD 23.90, indicating a 2023 price/book ratio of 0.6 times. This trends below its prepandemic trading range as we modeled a slowing housing sales growth coupled with tempered improvement in asset turnover for the next five years. That said, our valuation suggests an over-40% upside to the A-share price as of May 29, 2023, as we believe that the gradual rebound in profit margins has not been fully priced in. With the resumption of homebuying activity in China and the rising mix of higher-margin investment property income, we foresee that Vanke’s profitability will continue to recover, with operating margins rising to 18.3% in 2027 from 15.1% in 2022. Despite the recent weakness in sales, we expect Vanke’s focus on acquiring landbank in wealthy cities and well-delivered products will help revive its sales growth in 2024.

Although Vanke remains one of the top five developers in China in housing sales, we assign a no-moat rating to the firm, in line with peers such as China Overseas Land & Investment and China Resources Land. The no-moat rating is mainly due to high fragmentation of the sector, lack of pricing power given stiff competition in higher-tier cities, and vulnerability to macroeconomy and policy headwinds for Chinese developers. For cost, we think Vanke has not seen a long runway of cheap and valuable land to develop, particularly amid fierce competition over high-quality land parcels. In addition, we do not believe that the investment property businesses of Vanke or its peers warrant any moat, as no developer is dominant in premium assets in major cities where it operates.