China Vanke Earnings: Net Loss Incurred and Financial Health Worsened; Valuation Cut by 33%
We reduce our fair value estimate for China Vanke to CNY 9.00 per A-share (HKD 10.00 per H-share) from CNY 13.50 (HKD 15.00) following its underwhelming first-quarter 2024 results. While the firm only posted a 10% year-on-year revenue decline, we are more surprised by the CNY 300,000 million net loss, largely attributable to suppressed gross margins of properties delivered. As Vanke struggled to lift its contracted sales value, with a more than 40% decline in first-quarter 2024 versus the same period last year, we lower our five-year revenue compound annual growth rate assumption to 1.5% from 2.7%. For margins, Vanke’s property development business had gross margin contraction of 670 basis points to 10.5% in the first quarter, which we expect to edge up through 2024 with an improving mix shift to wealthy cities. That said, we are more downbeat on Vanke’s long-run profitability amid negative buyers’ sentiment and cut our 2024-28 gross margin forecast by 180-330 basis points, leading to our midcycle gross margin dropping to 14.0% from 15.8%. Consequently, our 2024-28 EPS forecasts are down by 20%-37%, which accounts for the 33% reduction in our valuation. While China Vanke’s A-shares are trading in 4-star territory, we prefer state-owned peers such as China Overseas Land & Investment, which have more valuation upside.