China Overseas Land & Investment Earnings: Valuation Cut Given Lower Bookings and Higher Inventory

We lower our fair value estimate on China Overseas Land & Investment 00688, or COLI, to HKD 26.00 from HKD 31.00 following slower revenue booking and inventory absorption assumptions. First-half revenue fell 14.1% year on year, missing Refinitiv consensus, which we mainly ascribe to slower inventory clearance in lower-tier cities. Although we expect a material top-line improvement for the second half off a low base, we cut our 2023 forecast revenue and net profit by a respective 7.8% and 4.2%. In addition, we push back our inventory clearance assumption to 2027 on a prolonged negative homebuying sentiment. While management maintained its guidance for 2023 sales to grow 20%, we think this will only translate to bookings starting in 2025. Despite the valuation revision, COLI remains our top pick as its shares are trading at a 40% discount to our fair value estimate. We believe the market is underappreciating COLI’s robust landbank in wealthy regions and healthy margins, and view potential favorable policy measures as near-term catalysts for the firm.

COLI’s first-half contracted sales (excluding associates and joint ventures) grew 23.5% year on year, but the over 20% sales dip in June and July 2023 is concerning. While we expect COLI to achieve the 20% sales growth target for 2023 due to accelerating landbank addition in higher-tier cities, stiff competition will likely slow acquisitions through land auctions over time. As such, we expect COLI’s housing sales growth to slow to 8.1% in 2027 from 21.0% in 2023. Another overhang for COLI is its elevated inventory level with an average turnover period trending above three years. Management did not provide details in inventory strategies, and we continue to foresee a prolonged cycle for COLI’s associates to offload unsold units in lower-tier cities.