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 000002 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 drop in property development revenue has compressed all three firms’ segment gross margins, with year-on-year declines of 580 basis points for CR Land, 70 for Vanke, and 800 for Jinmao, respectively. Significant margin contraction for Jinmao was due to muted contribution from primary land development and lower selling prices. Despite near-term headwinds, all three companies foresee a gradual profit recovery, given improved margins for new projects. Looking forward, the three developers remain committed to acquiring high-quality land parcels in higher-tier cities, which is set to benefit sales amid ongoing policy easing. For 2023, we expect the three developers to meet their prudent cash collection target, with CRL and Jinmao likely posting double-digit sales value growth.