Country Garden Earnings to Recover, but Growth Outlook Is Weak; FVE Lowered to HKD 2.80

No-moat-rated Country Garden Holdings, or CGH, posted a net loss in 2022 for the first time since its listing in 2007, albeit in line with its profit warning. Revenue also saw a 17.7% year-on-year slump due to delivery disruption and tempered inventory clearance in 2022. While management is optimistic that top line growth will recover with a pickup in housing demand, we think the sales drop in 2021-22 will weigh on revenue booking over the next few years. Excluding one-off impairment and foreign exchange loss, CGH’s core net profit remained positive at CNY 2.6 billion, despite a pronounced dip from 2021 levels. Although CGH has ramped up projects in Tier 1 and Tier 2 cities to lift margins, we expect the improvement to be gradual given stiff competition for limited landbank. We also foresee that inventory turnover of CGH will be slower than state-owned peers given heavier exposure to lower-tier cities. As such, we trim our fair value estimate to HKD 2.80 from HKD 5.10 on lower margins and higher inventory days assumptions through 2027. Our revised valuation still implies a 23% upside to HKD 2.28 close price as of March 30, 2023, and we believe stable dividend yield will resume with the turnaround in CGH’s profitability.