China Developers Earnings: Top-Line Weakness Hits Profit, but Recurring Income Brings Hope

We keep our fair value estimates for China Resources Land, or CRL, at HKD 43.00, and China Vanke at CNY 21.00 (HKD 23.90) per share, but lower China Jinmao's to HKD 1.50 from HKD 1.90, mainly on a lower gross margin forecast for 2023. All three developers saw first-half 2023 top-line year-on-year declines in property development, which we think were mainly due to slower inventory clearance and a lingering downcycle for project completion. This was partially offset by robust growth in recurring income from investment properties, driven by recovery in retail sales, and foot traffic. Also, the three developers’ key commercial projects saw margin improvement as occupancy and rental rates rose. Although we expect property development earnings to be sluggish in 2023, demand rebound under policy tailwinds should translate into better margins over the next few years. While these three developers and China Overseas Land & Investment, or COLI, which reported earlier, are trading at 4-stars currently, we like CRL and COLI best, given their presence in wealthy cities and outstanding financial strength.