China Resources Land Ltd (1109 HK) – Decent results though slightly below expectations
• FY21 core PATMI rose 10.2% to RMB26.6b
• Full-year FY21 dividends per share also increased 10.2% to RMB1.38 (~HKD1.692)
• Targeting double-digit core earnings growth in FY22
Decent FY21 results though a slight miss – China Resources Land (CR Land; 1109 HK) reported FY21 revenue and gross profit of RMB212.1b and RMB57.2b, representing growth of 18.1% and 3.2%, respectively. Gross profit margin fell 3.9 percentage points (ppt) to 27.0% in FY21, with the drag coming mainly from its property development business, which saw a 5.4 ppt compression in gross profit margin to 23.7%. This was partially offset by a 2.0 ppt improvement in gross profit margin to 73.9% for its property investments (excluding hotels) segment. Core PATMI jumped 10.2% to RMB26.6b, but was slightly below our expectations as it accounted for 97% of our full-year FY21 forecast. Management is still aiming for low-teens growth for its core earnings in FY22, and this would be supported by continued strength for its investment properties portfolio. A final dividend per share of RMB1.207 was declared, and this culminated in full-year dividends of RMB1.38 (~HKD1.692) per share, an increase of 10.2%. This translates to a dividend yield of 4.6%, based on a closing price of HKD36.50.
Recurring income from investment properties to provide continued resilience – CR Land’s rental income from its investment properties jumped 36.3% to RMB17.4b in FY21, of which 80%, 11% and 9% were contributed by shopping malls, offices and hotels, respectively. As previously guided by management, its rental income was able to fully cover its dividend and interest expenses in 2021 (coverage ratio of 1.01x). Looking ahead, CR Land is targeting retail rental income growth of 20% in FY22, notwithstanding the impact from the Omicron variant. For its property development business, CR Land achieved contracted sales of RMB315.8b on a gross basis in FY21, representing growth of 10.8% (attributable contracted sales grew 16% to RMB216.0b). It has saleable resources of RMB527.8b for FY22, of which more than 90% are in Tier-1 and 2 cities. We expect management to target positive growth in contracted sales for FY22 and a top 10 market position.
Maintaining a prudent capital management approach – CR Land continued to maintain a solid financial position, as its net gearing ratio declined from 33.3% (end-FY20) to 30.4% (end-FY21), while average borrowing costs dipped 37 basis points to 3.7%, both of which are among the lowest in the sector. Despite CR Land’s healthy balance sheet, management highlighted that it would not be aggressive in pursuing growth and prefers to remain prudent. We pare our FY22F core PATMI forecast by 5.1% on lower margin assumptions, and introduce our FY23F forecasts. Notwithstanding our lower earnings projections, we raise our fair value estimate from HKD43.66 to HKD44.60, pegged to a higher price-to-earnings (P/E) multiple of 8.9x (previously 8.6x) on account of further policy easing signs in the real estate industry and CR Land’s improved financial position.
ESG Updates
CR Land’s ESG rating was upgraded in Aug 2021. This upgrade was driven in part by CR Land’s efforts to certify all its new properties to China’s Three Star green building standard. 22.9% of CR Land’s portfolio by building area was certified in 2020, which was above the industry average. Furthermore, CR Land is also ahead of its peers in adopting construction quality controls, and has come up with executive-level oversight and linked executive pay to safety indicators to strengthen accountability on the aspect of ‘Health & Safety’. That said, areas of improvement include needing to have a more detailed anti- corruption policy and provision of legal protection for whistle-blowers. BUY. (Research Team)