China Vanke Earnings: Top-Line Growth Disappointed but Inventory Improved; Shares Undervalued

No-moat China Vanke 000002 reported an underwhelming 32% year-on-year revenue drop for the third quarter of 2023, mostly due to a 37% decline in real estate development income. We think slower-than-expected delivery progress, coupled with deteriorating housing sales, led to the slump in Vanke’s bookings. Gross margins for the development business also dipped to 18.5% year-to-September from 20.7% for the same period last year, which we largely ascribe to subdued home prices. That said, strong inventory correction continued in the third quarter, and we credit Vanke for effectively offloading unsold units. As such, we reduce our top-line growth and margin forecasts but expect a faster inventory turnover for 2023, translating to an unchanged fair value estimate of CNY 21.00, or HKD 23.90, per share. We continue to like Vanke’s resilient landbank reserve and sufficient liquidity. The company’s current 0.3 times price/book ratio remains the lowest since 2019, which presents buying opportunities for investors looking beyond the downcycle, in our view.

Vanke lagged full-year completion schedule with only 58% of the planned area delivered through September 2023. While the company will likely accelerate project delivery in the fourth quarter, we still anticipate an 18% year-on-year drop in development revenue for 2023. Year-to-September sales also declined by over 10% amid weak demand, which we expect to persist through to the end of 2023. However, we foresee a double-digit sales rebound each year in 2024-26 given Vanke’s strength in wealthy regions. Another positive is Vanke’s cutting inventory by 10% within nine months of 2023. As homebuyers pivot to completed projects from high-quality developers, we expect Vanke to further improve inventory clearing speed.