China Overseas Land & Investment Earnings: Top-Line Growth and Margin Improved Amid Sector Recovery

We are raising our fair value estimate for no-moat China Overseas Land & Investment 00688 to HKD 31 per share from HKD 29 after the firm reported business updates for the first quarter of 2023. Overall, COLI posted a low-teens percentage year-on-year revenue growth, with improvement in operating margins to 20.7% from 17.1% for same period last year. Previously reported robust first-quarter sales growth (excluding associates and joint ventures) has given us more confidence that the sound recovery of housing demand in higher-tier cities will continue to benefit COLI. As such, we moderately revised up our sales forecast for 2023-24, leading to higher revenue growth for 2025-26. In the short run, we also expect stronger top-line rebound under normalized delivery and faster inventory turnover. That said, we are more conservative on gross margins amid an overheating landbank market and have mildly cut our assumptions through 2027. Our updated fair value estimate implies a price/book ratio of 0.8 times for COLI, higher than the 0.5 times as of April 26. COLI remains our top pick of the sector, as we believe the market is underestimating its top line and profitability recovery potential.

First-quarter contracted sales of COLI was solid with a 66% year-on-year growth, which we mainly attribute to its focus on wealthier regions and a low base last year. Management reiterated the 2023 sales target of 20% in a prior call, which we view as slightly conservative given recent sales trends. Hence, we fine-tuned our sales growth estimate to 24% for 2023 as COLI continues ramping up landbank with a healthy sell-through rate. Within the broader picture, first-quarter sales for most state-owned developers outperformed the average of top 100 ones in China, which saw a marginal 2.6% year-on-year growth as per CRIC. Over the next few quarters, we expect state-owned peers to maintain strong sales momentum given their dominance in landbank acquisitions in higher tier cities.