Takeaways from virtual property conference
? COLI expects its sales to rebound in Jun vs. May, though still much lower yoy
due to the high base a year ago.
? COLI sees the property markets of small cities as very challenging due to
weak demand and high inventory.
? COLI is not keen on M&As given the difficulty in managing M&A-related risks,
and prices for land from land auctions are currently attractive. Reiterate Add.
Jun sales to be higher than May but still well below last Jun’s
? COLI participated in our virtual property conference this week. Below are some of the
key takeaways from meetings with COLI’s management.
? 5M22 sales were Rmb95bn, down 39% yoy. May sales were Rmb26bn, up 30% mom,
partly due to the inclusion of sales from a Hong Kong project in Yuen Long. On a yoy
basis, May sales were significant lower, down 23% yoy.
? Management believes market sentiment had bottomed in Apr, and improved
meaningfully in May. It expects Jun sales to exceed May’s, but still well below last Jun’s.
? Management expects sales to continue to improve when supportive measures such as
lower down payment for property purchases and lower mortgage rates, materialise.
M&As not as easy as some investors think
? In 5M22, COLI acquired 17 plots of land for total cost of Rmb35bn, including three
parcels from its associate company COGO (81 HK, not rated). Most of these lands were
acquired from public auctions.
? In the past 6-9 months, COLI has also acquired some projects from other developers or
from its JV partners.
? On the issue of M&A, management said COLI is open to it, as long as the target meets
the minimum requirement of not less than 12% for return on investment or not less than
15% for internal return of requirement (IRR). However, COLI prefers project-based
M&As instead of corporate level M&As, as it is difficult to assess the risks related to
M&As. In the past six months, COLI has not concluded any deals to acquire its
competitors.
? Management further added that land prices have turned more attractive in the past 6-9
months and many of land parcels it had acquired in the past 6-9 months were transacted
at a low premium or at reserve price only.
Low tier cities’ property market very challenging
? Management said the polarisation of property markets between top tier and small cities
is quite obvious in China.
? Demand in low tier cities is quite weak, due to 1) high inventory level, 2) weaker
economy, and 3) population outflow.
? Overall, COLI will be very selective in buying land in smaller cities, it said.
Moderately fast asset turn strategy to continue
? Management said COLI will continue its moderately fast asset turn strategy, adopted
since 2018. COLI will keep buying land given its strong balance sheet.
? Management expects GPM to stay at a low level in FY22 to reflect the weak market in 2021.However, it said a 20% GPM (achieved in FY21) is quite low and unlikely to drop
further, as land prices have already come down.
Maintain Add and TP of HK$28.2
? We maintain our Add rating and TP of HK$28.2, based on 10% discount to NAV.
? We believe COLI is one of the key beneficiaries of the rapid consolidation in China’s
property market given its strong balance sheet and state-owned enterprise status.
? Downside risks to our call include weaker-than-expected recovery of property sales in
2H22F. Potential re-rating catalysts include more supportive measures from regulators