Multiple catalysts ahead
- Key beneficiary of likely acceleration of CREIT initiative’s development
- Margins and earnings should improve from FY25F when it starts to recognize development earnings from lower cost projects acquired in FY22-23
- A-share placement application in progress and may its cap near-term share price performance
- Maintain BUY with revised HK$16.80 TP for H-share and Rmb18.42 for A-share
Investment Thesis
Well-rounded industry leader with multiple engines. Established over 30 years ago, Vanke is among the front-runners in the property space that have branched out and established a sizeable presence in multiple asset classes and business lines. Aside from its consistent top 3 positioning in the residential
space, Vanke also has an industry leading property and facility management arm (Onewo (2602 HK)), one of the largest rental housing and sizeable warehouse and retail mall portfolios in China.
Bottoming margins and earnings. Vanke’s near-term earnings outlook may remain challenging with its development revenue likely to fall as a result of weaker presales and GPM under pressure as it starts to recognize lower margin projects that were sold in FY21-22. Having said that, a gradual pickup of its higher margin new businesses would serve to partially cushion the impact. Signs of recovery should start to show from FY25 as earnings from projects acquired at lower costs in FY22-YTD-23 start to be recognized.
Key beneficiary of the accelerating CREIT initiative’s development. Vanke has a scalable logistic asset base (c.Rmb1bn of gross revenue in 3M23 incl. unconsolidated businesses), sizeable rental housing portfolio (c.81,400 units qualified for subsidized rental residences) and a good mix of shopping malls
under its associate company SCP Group. These place Vanke well to benefit from the accelerating C-REIT development. The company is awaiting national NDRC approval for its logistics CREIT application (initial scale of c.Rmb1.2-1.3bn) as early as 2H23. They have also filed applications to spin-off its shopping malls
(potentially be included in the first batch) and rental housing assets. These should help to catalyse Vanke’s share price performance.
Maintain BUY with a lower HK$16.80 TP for H-share and Rmb18.42 for A-share. We trim FY23/24F earnings by 5-8% to reflect slower development recognition and booking GPM. Our TPs are derived from SOTP valuation based on FY23F earnings: (1) 15x PE for PM (prior: 20x), 1-yr average forward PE (2) unchanged 15x EV/EBITDA on IP business and (3) 6x/8x PE for property development and others (Vanke’s average 1-yr forward PE in H-share and A-share, respectively).
