China Overseas Land and Investment (688 HK)Poised for inorganic growth and market share gains
• FY21 core PATMI declined 4.3% to RMB36.4b
• Dividends per share increased 2.5% to HKD1.21 in FY21
• Room for further inorganic growth opportunities and market share gains
FY21 core PATMI declined and missed our expectations, but dividends raised – COLI’s (Stock code: 688 HK) FY21 revenue jumped 30.4% to RMB242.2b but gross profit only inched up 2.2% to RMB57.0b due to a compression in gross profit margin by 6.5 percentage points (ppt) to 23.5%, which was weaker-than-expected. Reported core PATMI fell 4.3% to RMB36.4b and missed our forecast by 9.0%. Core PATMI margin fell from 20.5% in FY20 to 15.0% in FY21. Management acknowledged the significant decline in margins, but pointed out that its core PATMI margin was still among the highest in the industry. Notwithstanding the core earnings decline, COLI raised its full-year dividends by 2.5% to HKD1.21 per share, representing a payout ratio of 30.1% and a dividend yield of 5.2% (based on share price of HKD23.45).
Targeting steady contracted sales growth in FY22 – COLI and its group series of companies (including joint ventures, associates and China Overseas Grand Ocean (COGO)) achieved total contracted sales of RMB369.5b in FY21, which was an increase of 2.4%. Cash collection ratio remained high at 95.5%. Looking ahead, COLI highlighted that it is targeting steady growth in contracted sales and land budget in FY22, but its guidance for the year was vague in contrast to past years, where it gave specific targets. This was likely due to the uncertain operating environment. That said, management mentioned during the analyst briefing that it believes that Jan and Feb were likely the low points of the year, and Tier-1 and stronger Tier-2 cities are expected to see a faster recovery as compared to lower tier cities. Management also seized market opportunities to carry out meaningful M&A activities, such as the acquisition in stakes in a mixed-use residential and commercial complex in Jan 2022 known as Guangzhou Asian Games City, of which saleable resources is estimated to be RMB35.1b. We believe it will target more M&A transactions this year. The land bank of COLI and its group series of companies (excluding COGO) stood at 51m sqm (attributable basis: 43.6m sqm), as at 31 Dec 2021, with total saleable resources of ~RMB1.04b, of which 39.8% is located in Tier-1 cities and Hong Kong and Macau.
Solid balance sheet – In terms of financial position, COLI’s net gearing ratio was stable and remained at a healthy 31.1%, with an average borrowing cost of 3.55%. Both metrics are among the lowest in the sector. After fine-tuning our assumptions, we are projecting more modest core PATMI growth of 0.7% for FY22 and 4.9% for FY23, but are raising our target price-to-earnings (P/E) peg from 6.5x to 7.2x to account for further policy easing signs, COLI’s continued solid financial position and room for market share gains and increased inorganic growth opportunities. Our fair value estimate declines slightly from HKD29.22 to HKD28.76.
ESG Updates
COLI has an ESG rating since Oct 2018, which suggests that no significant progress has been made on this front for almost three years. COLI is ranked strongly on the ‘Opportunities in Green Building’ category, given that it has certified 70% of its portfolio to green building standards, as compared to only a 29% industry average as of Dec 2020. However, COLI’s corporate governance practices trail those of global peers, notably its board structure. For instance, COLI’s board has a lack of independent majority, and having overboarded directors could limit its ability to provide strong oversight of management. Notwithstanding these factors, we note that COLI was one of the first companies to be included in the Hang Seng ESG50 Index, and management appears to be stepping up its focus on ESG matters from our conversation with them. BUY. (Research Team)