Vanke: Lowering Fair Value Estimate by 17% on a More Negative Outlook After Interim Profit Alert
We cut our fair value estimate on China Vanke to CNY 7.50 per A-share (HKD 8.30 per H-share) from CNY 9.00 (HKD 10.00) given the firm's profit warning of a CNY 7 billion-CNY 9 billion net loss for the first half of 2024. This marks a material deterioration from the CNY 9.9 billion in net profit for the same period last year, which management ascribes to weaker gross margins, write-offs on projects, and investment losses. Accordingly, we lower our first-half and full-year 2024 estimates to net losses of CNY 8.0 billion and CNY 6.6 billion, from net profits of CNY 5.7 billion and CNY 15.8 billion, respectively. We are also more conservative about Vanke’s long-run profitability as we expect new home prices to only stabilize from 2025 onward. As such, we lower our midcycle operating margin assumption to 6.2% from 9.5% to factor in a slower margin recovery, leading to a 38% decline in operating profit for 2028 from our previous estimate. While the subdued earnings for the first half may be within the market’s expectation, we now see a more limited share price upside for Vanke’s A-shares, as the company will likely struggle to revive its property development margins.