Company Reports

China Jinmao’s 2023 results were underwhelming, with a 13% decline in revenue and a CNY 6.9 billion net loss. Stripping out one-off items, Jinmao’s adjusted earnings dropped by over 80% due to subdued property sales profit and elevated operating costs. The property development segment's gross margin tumbled to 9% in 2023 from 13% a year ago, which management ascribed to low contribution from higher-margin primary land development and falling home prices. That said, we factor in a pickup in the segment’s gross margin to 12% by 2028, amid a price recovery. Given a more conservative housing sales outlook, we also lower our five-year development revenue CAGR to 4.0% from 6.0%. Moreover, we think Jinmao’s rising net gearing ratio and funding cost, compounded by a lack of final dividend payout for 2023, are of concern to shareholders. More borrowings also led to an over 50% rise in net debt to CNY 85.2 billion as of end-2023, which negatively affects our valuation. As such, we lower our fair value estimate to HKD 0.70 per share from HKD 1.50. While Jinmao's shares remain underpriced, we think state-owned peers such as China Resources Land offer investors a more appealing risk/reward and dividend yield.

China Jinmao mainly engages in development of high-end properties in wealthy cities of China, with focus shifting to the city operation model in recent years. Through this model, Jinmao capitalizes on the strong ties with local government and taps into sizable primary and secondary land development projects. While primary land development warrants better margins, given lower land cost via a nonauction channel, we think it’s susceptible to large fluctuations in brownfield land provision by the government. That said, we expect China Jinmao to continue to source low-cost landbank for secondary land development through city operation. Despite a pronounced sales dip in 2022-23 amid weak homebuyer sentiment, China Jinmao’s premium projects should maintain traction among housing upgraders, boding well for a moderate sales recovery through 2028, in our view.

We published our inaugural China real estate industry pulse for the first quarter of 2024 with the view that housing demand should gradually recover through 2026, supported by ongoing policy tailwinds. While new home sales in China remained sluggish in 2023, the nationwide average price was steadier due to a continuing mix shift to wealthier regions with more resilient prices. Moreover, we like the ramping-up of supportive measures since the second half of 2023 and expect further easing in buying restrictions and mortgage rate cuts in large cities. While share price performances could remain volatile in the near term, we see an improving risk/reward profile at the current valuation as the market may be missing key developers' improving sales outlooks. As such, we prefer top state-owned builders, China Overseas Land & Investment and China Resources Land, as both have seen better sales growth, higher asset quality, and healthier gearing ratios versus their peers.

China Jinmao mainly engages in development of high-end properties in wealthy cities of China, with focus shifting to the city operation model in recent years. Through this model, Jinmao capitalizes on the strong ties with local government and taps into sizable primary and secondary land development projects. While primary land development warrants better margins, given lower land cost via a nonauction channel, we think it’s susceptible to large fluctuations in brownfield land provision by the government. That said, we expect China Jinmao to continue to source low-cost landbank for secondary land development through city operation. Despite a pronounced sales dip in 2022 amid weak homebuyer sentiment, China Jinmao’s premium projects should maintain traction among housing upgraders, boding well for a moderate sales recovery through 2027, in our view.

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.

The Hong Kong market experienced a solid rally following the July 24 Politburo meeting, with the real estate stocks rebounding from recent losses. We believe signs of government support are positive but we would have liked to see more in addressing excess property inventory. We believe more details will emerge along with ongoing policy adjustments, but for the time being, our view remains that China’s real estate activity will recover gradually through 2025. As a result, we think risks remain in the sector with negative news likely to continue regarding possible defaults. There was no explicit language in the messages regarding financial support for the real estate developers. As such, we continue to prefer buying China Overseas Land & Investment over others given financial strength and an attractive project pipeline in Tier 1 and Tier 2 cities.

We are transferring coverage of China state-owned developers—namely China Overseas Land & Investment, or COLI; China Resources Land, or CR Land; and China Jinmao. While we maintain our fair value estimates of HKD 31.00 for COLI and HKD 43.00 for CR Land, we lower Jinmao’s to HKD 1.90 from HKD 2.40, due to more conservative estimates on gross margins through 2027. Amid recovering homebuyer confidence, we believe the property development revenue of the three developers will post a meaningful rebound in the next few years, leading to pickups in earnings off low bases in 2022. Also, we think large state-owned developers such as COLI and CR Land will fare better than peers in sales thanks to landbank replenishment in higher-tier cities, strong operating efficiency, and robust funding status. In our view, all three developers are undervalued as the market’s negative sentiment is unwarranted given improvement in their financial performances. Our top pick for the sector remains COLI.

China Jinmao mainly engages in development of high-end properties in wealthy cities of China, with focus shifting to the city operation model in recent years. Through this model, Jinmao capitalizes on the strong ties with local government and taps into sizable primary and secondary land development projects. While primary land development warrants better margins, given lower land cost via a nonauction channel, we think it’s susceptible to large fluctuations in brownfield land provision by the government. That said, we expect China Jinmao to continue to source low-cost landbank for secondary land development through city operation. Despite a pronounced sales dip in 2022 amid weak homebuyer sentiment, China Jinmao’s premium projects should maintain traction among housing upgraders, boding well for a moderate sales recovery through 2027, in our view.

China Jinmao’s 2022 results are largely in line with our estimates except for the bottom line, which fell short due to higher minority interests than we assumed. While the good news is that we’re only making minor adjustments to our 2023-25 revenue and operating profit forecasts, we factor in the higher minority interest leading to lower attributable earnings. The company is guiding for stronger cash flow from property sales of CNY 98.9 billion, which is around 8% above our prior forecast. However, given lower booked sales in 2022, we now expect revenue to decline 4.4% in 2023 leading to flat EPS. That said, we expect a much stronger recovery in 2024 as confidence returns to the real estate market in China and as excess inventory is absorbed. We raise our fair value estimate to HKD 2.40 from HKD 2.26.

China Jinmao was well known for its portfolio of quality investment properties, consisting of high-grade office space and luxury hotels. Its iconic asset, Shanghai Jinmao Tower, completed in 1999, stood as the tallest building in China in nearly a decade and was instrumental in turning the city’s Pudong district into the country’s financial center. However, since its IPO in 2007, the company achieved subpar growth relative to its peers where many focused on development properties under a quick-turnaround asset model.

We cut our fair value estimate on Jinmao to HKD 2.26 from HKD 3.38 after lowering assumptions on the pace of its inventory sales. Although we believe 2022 should present the trough in the value of contracted sales for better-positioned developers such as Jinmao, we believe the industry will still face margin pressure through 2024 with subdued real estate prices and the cycling through of higher priced landbank. While our base case view reflects continued challenges, with sales data to remain choppy and sluggish in first-half 2023, we expect sales for developers with better-located projects to improve by 5%-10% for the full year given the low base in 2022, the absence of lockdowns, and a recovery in consumer confidence to provide a floor to demand. We think Jinmao’s current share price reflects much of the risk, but our preferred pick remains China Overseas Land & Investment, or COLI, for its balance sheet strength.

China Jinmao was well known for its portfolio of quality investment properties, consisting of high-grade office space and luxury hotels. Its iconic asset, Shanghai Jinmao Tower, completed in 1999, stood as the tallest building in China in nearly a decade and was instrumental in turning the city’s Pudong district into the country’s financial center. After the IPO in 2007, however, the company achieved subpar growth relative to its peers where many focused on development properties under a quick turn asset model.

The Chinese government has over the past few days laid out plans to support the real estate sector, leading to sharp share price gains for the real estate developers. While we think the recent policy moves are in the right direction to assuage debt risks, we believe more is needed, which we hope will materialize over the next six months. We think the initiatives are supportive of the share prices in the near term, but we maintain our view that we need to see a return of homebuyers’ confidence to support contracted sales, as this is essential for a durable improvement in the developers’ credit environment. We think indebted developers may see a lag in the return of buyers’ confidence compared with that for financially stronger companies. At this stage, we maintain our view for revenue and profit to trough in 2023 for the sector, but we see financial positions improving during the year. The policy support doesn’t change our view that state-owned developers, such as China Overseas Land and Investment, or COLI, and China Resources Land, or CRL, should still be best positioned to pick up reasonably priced landbank given their stronger balance sheets, which gives them a competitive edge in future projects.

Four China developers under coverage—Country Garden, China Jinmao, China Resources Land, and Agile—released first-half results at the end of the reporting period. The results takeaways support our continued preference for state-owned enterprise, or SOE developers. Bellwether Country Garden headlines the challenge to private developers, weighed by the weak property market, in which Country Garden’s first-half earnings are severely affected by the slowdown in project deliveries and continued margin disappointment. The weakness in its results were similarly observed in private developer Agile’s first-half result. On the flip side, the results of SOE developers, China Jinmao and China Resources Land, or CRL, are still showing steady results. This is consistent with China Overseas Land & Investment, or COLI, which reported first-half results earlier.

China real estate activity has been weak through the first half of 2022, in line with our earlier expectations for the physical market weakness to persist. Despite green shoots of recovery in June, the pace of recovery, however, may be hampered by the start-stop zero-COVID-19 policy that likely limits the positive impact of policy easing. We differ from the market view that easing policies in the form of lower mortgage rates are adequate to support rapid recovery once lockdowns recede. Instead, we believe that healing the developers' access to credit is key to longer-term recovery. We expect any recovery to be slow as we do not expect a quick rebound in homebuyer confidence, and we think homebuyers will be selective. Support from financial institutions for onshore debt backed by derivatives for some developers strikes the liquidity issue at its heart—however, it has not lifted markets. Action in the bond market implies that investors remain concerned with the long-term debt repayment ability of some developers, especially if presales activities remain at a slower pace. Lenders may also be choosy, capping the abilities of some developers to expand.

No-moat Jinmao’s results outperformed our expectations, as revenue and core earnings rose by 50% and 49%, respectively, year on year on higher sale properties delivered. Gross margins saw pressure, but management sees current development gross margin at around 18% bottoming as new projects and unbooked projects are also at a similar level. No final dividend was declared, which may disappoint some investors, as the company pointed to the distribution of Jinmao Services earlier as special dividend and to conserve cash in view of looking at mergers and acquisitions. While we were earlier disappointed that the spinoff of Jinmao Services did not result in a divestment to improve liquidity, the company had a different view and noted the separate listing of Jinmao Services is not for capital raising but to streamline the business line to a separate platform. We increase our fair value estimate to HKD 3.38 from HKD 3.04 after raising revenue and earnings estimates. Overall, the company maintained its city operation model strategy, sped up sales and cash collection, and aimed for at least double-digit growth.

China Jinmao was well known for its portfolio of quality investment properties, consisting of high-grade office space and luxury hotels. Its iconic asset, Shanghai Jinmao Tower, completed in 1999, stood as the tallest building in China in nearly a decade and was instrumental in turning the city’s Pudong district into the country’s financial center. After the IPO in 2007, however, the company achieved subpar growth relative to its peers where many focused on development properties under a quick turn asset model.

Despite the challenging market conditions and weak investment sentiment toward the sector currently, Jinmao is pushing ahead with the proposed spin-off of its property management unit, Jinmao Services. Based on an information update provided by the company, Jinmao plans to proceed with the spin-off via: 1) distribution in specie of Jinmao Services to existing Jinmao shareholders based on one Jinmao Services share for every 66.2 Jinmao shares; and 2) listing share sale of up to 14.4% of Jinmao Services shares to generate net proceeds of about HKD 728.9 million. The offer price for the Jinmao Services shares is in the range of HKD 7.52 and HKD 8.14 per share, translating to market capitalization in the range of HKD 6.8 billion to HKD 7.6 billion for Jinmao Services post spin-off. Of note, the share distribution in specie and in turn the spin-off are subject to the listing share sale. Nonetheless, according to the prospectus, about 90% of the share sale book building is already covered by cornerstone investors, which should imply the planned spin-off is likely to complete and first day of trading is scheduled on March 10, 2022. With Jinmao still consolidating Jinmao Services post spin-off, we fine-tune our fair value estimate to HKD 3.04 from HKD 3.08 and the proposed spin-off does not change the company’s no-moat rating. We expect the challenging market conditions to continue weighing on the company’s share price.

China Jinmao was well known for its portfolio of quality investment properties, consisting of high-grade office space and luxury hotels. Its iconic asset, Shanghai Jinmao Tower, completed in 1999, stood as the tallest building in China in nearly a decade and was instrumental in turning the city’s Pudong district into the country’s financial center. After the IPO in 2007, however, the company achieved subpar growth relative to its peers where many focused on development properties under a quick turn asset model.

China Jinmao was well known for its portfolio of quality investment properties, consisting of high-grade office space and luxury hotels. Its iconic asset, Shanghai Jinmao Tower, completed in 1999, stood as the tallest building in China in nearly a decade and was instrumental in turning the city’s Pudong district into the country’s financial center. After the IPO in 2007, however, the company achieved subpar growth relative to its peers where many focused on development properties under a quick turn asset model.