Well-deserved valuation premium
- Reaffirms its commitment to maintaining low double-digit earnings growth
- Gradually moving towards the end of its multiple-year margin compression trend
- A likely beneficiary of a potential physical market recovery, given its Tier 1, 2 city-centric saleable resources
- Maintain BUY and sector top pick with TP of HK$50.93
Investment Thesis
Reaffirmed its commitment to maintain low double-digit earnings growth for 2022. On one hand, CR Land’s revenue growth will likely be well supported by a stable progression in its development business
(unbooked sales as at Dec 21 stood at c.Rmb218bn) and robust growth from CR MixC (1209 HK, 40%+ growth) and its IP business (20%+ growth). Meanwhile, recognised GPM fell to 27% in FY21 alongside a drop in the development margin to 23.7%. With CR Land’s target to maintain a c.20% GPM for property development and its aim to maintain its overall GPM at c.25%, its multiple-year margin compression trend should soon reach the end of the tunnel. These, coupled with CR Land’s plan to control operating costs, should support the company in achieving its commitment to maintain double-digit earnings growth.
A likely beneficiary of a potential physical market rebound in 2H22, thanks to its well-located saleable resources. CR Land prudently planned to launch c.Rmb528bn of saleable resources for 2022, a slight decline of c.3% from its actual level of c.Rmb544bn launched in 2021. Of this, 93% of its planned saleables are located in Tier 1 and 2 cities. This places CR Land well, both in terms of presales defensiveness and
growth potential, as higher tiered cities show more resilience in demand and are the first to see strong sales rebounds, thanks to their generally superior city economic and demand dynamics.
Valuation:
Our TP is based on a sum-of-the-parts (SOTP) valuation model that assigns 1) 30x FY22F PE on attributable earnings from CR MixC Lifestyle (1209 HK); 2) 10x EV/EBITDA on its IP business; and 3) 8.0x
FY22F PE on development earnings (equivalent to CR Land’s 3-year average 1-year forward PE).
Where we differ:
Gross margins should be bottoming. While CR Land’s development margins will likely fall gradually to c.20% as more of its newly acquired land is recognised, we believe downward margin pressure from this
end will likely be partially offset by the rising contribution from its recurring businesses. We believe CR Land can maintain an overall GPM of 25% in the medium term.
Key Risks to Our View:
Larger-than-expected margin pressure from its development business, below-expected pre-sales performance, and economic downturn in China may affect overall luxury retail sales and thus its
mall performances.