Good Performance Through Third Quarter on Still Strong Margin, but Contract Sales Slowing

Poly Developments and Holdings reported year-to-September revenue and earnings of CNY 112 billion and CNY 12.8 billion, respectively. The top line was up 18% year on year, while earnings were up 34%. This strong growth in earnings was due to the still high margin, along with a smaller share of minority interest as the company undertook fewer joint ventures during the year. Slower contract sales and active land banking had pushed gearing higher during the period. We maintain our fair value estimate of CNY 16, along with our no-moat rating for the company. While the shares are fairly valued currently, the pending listing of the property management business could be a catalyst. The proposal received China Securities Regulatory Commission approval in mid-September, and is currently pending approvals from the SFC and Hong Kong Exchanges and Clearing. The property management business accounts for 1% of the company’s earnings, but a separately listed entity will likely trade at 20 to 30 times of the earnings versus 6 to 8 times for the parent.