Company Reports

No-moat China Overseas Land & Investment, or COLI, reported a 2.5% year-on-year revenue dip for first-half 2024. Operating profit also decreased by 6% but slightly beat our estimate given better-than-expected gross margins of properties booked. Additionally, the company’s profitability was bolstered by rising mix of higher-margin nondevelopment revenue to 6% from 4% a year ago. Management anticipated near-term challenges to linger but reiterated the goal of gaining residential market shares in wealthy cities. As we expect a contracted sales (mostly presale) decline for 2024, we cut our 2025-28 revenue forecasts by 2%-4% but raise our midcycle operating margin forecast by 20 basis points to 19.7%. We maintain our fair value estimate at HKD 21.0 per share, and COLI remains our preferred pick for China real estate given its more resilient earnings amid sector downturn.

As housing demand cools and credit growth slows, we believe the leverage-driven strong growth for China’s real estate developers is behind us. That said, we think large developers such as China Overseas Land & Investment, or COLI, will fare well as the industry consolidates, with smaller peers facing increasing liquidity constraints and slumping sales volume. During market downturns, COLI has been one of the few developers to achieve market share growth, through focusing on landbank quality upgrades and opportunistic acquisitions.

We view the recent favorable measures for the China real estate sector, including the scrapping of buying curbs in wealthy cities and the unwinding of the mortgage rates floor, as encouraging to homebuyers and investors. That said, we caution that potential buyers may remain on the sidelines amid falling home prices, and policy tailwinds will likely require a longer time to translate into a pickup in home sales. Additionally, although the CNY 500 billion in loans—backed by a relending facility from China’s central bank—to local state-owned enterprises for converting completed but unsold properties to affordable units should help clear excess inventory, execution risks remain, in our view. While the policy-induced rally has reflected the market sentiment shift, we maintain the valuations of stocks under our coverage, given industry fundamentals that are still weak. Despite a more demanding sector valuation, we think shares of state-owned developers such as China Overseas Land & Investment and China Resources Land remain attractive. We continue to prefer both names, given their more resilient contracted sales and better financial strength.

As housing demand cools and credit growth slows, we believe the leverage-driven strong growth for China’s real estate developers is behind us. That said, we think large developers such as China Overseas Land & Investment, or COLI, will fare well as the industry consolidates, with smaller peers facing increasing liquidity constraints and slumping sales volume. During market downturns, COLI has been one of the few developers to achieve market share growth, through focusing on landbank quality upgrades and opportunistic acquisitions.

No-moat China Overseas Land & Investment posted strong first-quarter 2024 preliminary numbers as revenue and operating profit—excluding foreign exchange effect—both saw double-digit year-on-year growth. While we view this as a continuation of the strong momentum for 2023, we maintain our forecast of a low-single-digit contraction for 2024 revenue due to weak presale since second-half 2023. Operating margin also pulled back to 18.2% for the first quarter from 20.8% a year ago, which we ascribe to more suppressed gross margins of projects delivered. As home price weakness will likely persist, we lower our 2024 operating margin assumption by 40 basis points to 17.5%, but we still expect a secular improvement to 19.5% in 2028 given a higher mix of landbank in wealthy cities. Our 2024-26 earnings and midcycle forecasts are largely unchanged, and we keep our fair value estimate for COLI at HKD 21.00 per share, suggesting a significant upside despite the recent runup. COLI is still our China real estate sector top pick, as we believe that investors underappreciate its profitability rebound potential and its sound financial health.

China Overseas Land & Investment, or COLI, ended 2023 with robust revenue and net profit numbers, as both beat Refinitiv consensus. While we view COLI as more resilient than most developer peers, we reduce our fair value estimate to HKD 21.00 per share from HKD 26.00 on more conservative earnings estimates over the next five years. Despite a 12% year-on-year growth in property development revenue for 2023, we think the property sales contraction starting in second-half 2023 will likely linger through 2025 and weigh on COLI’s bookings. Hence, we cut our five-year revenue CAGR assumption to 3.9% from 10.3%. Given our expectation for a slower home price rebound, we also reduce the midcycle gross margin forecast to 22.5% from 24.4%. That said, we think COLI should achieve a faster inventory absorption given strong brand recognition among homebuyers, backed by its sound balance sheet. Our new valuation still sees an 80% upside to COLI’s share price as of March 28, 2024, and the company remains our sector top pick. For the near term, we view the potential turnaround in new home sales in China as a driver for its share price performance.

As housing demand cools and credit growth slows, we believe the leverage-driven strong growth for China’s real estate developers is behind us. That said, we think large developers such as China Overseas Land & Investment, or COLI, will fare well as the industry consolidates, with smaller peers facing increasing liquidity constraints and slumping sales volume. During market downturns, COLI has been one of the few developers to achieve market share growth, through focusing on landbank quality upgrades and opportunistic acquisitions.

We published our inaugural China real estate industry pulse for the first quarter of 2024 with the view that housing demand should gradually recover through 2026, supported by ongoing policy tailwinds. While new home sales in China remained sluggish in 2023, the nationwide average price was steadier due to a continuing mix shift to wealthier regions with more resilient prices. Moreover, we like the ramping-up of supportive measures since the second half of 2023 and expect further easing in buying restrictions and mortgage rate cuts in large cities. While share price performances could remain volatile in the near term, we see an improving risk/reward profile at the current valuation as the market may be missing key developers' improving sales outlooks. As such, we prefer top state-owned builders, China Overseas Land & Investment and China Resources Land, as both have seen better sales growth, higher asset quality, and healthier gearing ratios versus their peers.

China Overseas Land & Investment's, or COLI's, third-quarter 2023 revenue and recurring operating profit jumped 61% and 96% year on year, respectively. This implies a pickup in operating margin to 12.5% for the third quarter from 10.3% a year ago. We think COLI’s top line benefited from a low base and normalized delivery, and we remain upbeat on its earnings recovery given more margin-accretive projects and cost initiatives. Moreover, a 30% sales increase (excluding associates and joint ventures) in September 2023 versus the same month last year reassures us that COLI could achieve the 20% sales growth target for full-year 2023. While we raise our 2023 revenue and operating profit assumptions by a respective 2% and 3%, we keep our fair value estimate for COLI at HKD 26 as our long-run profit forecast remains unchanged. Despite weak confidence in China’s real estate sector, we view COLI’s risk-return profile as attractive to long-term investors. Moving forward, we expect the company to outperform most China real estate developers on sales and earnings growth.

As housing demand cools and credit growth slows, we believe the leverage-driven strong growth for China’s real estate developers is behind us. That said, we think large developers such as China Overseas Land & Investment, or COLI, will fare well as the industry consolidates, with smaller peers facing increasing liquidity constraints and slumping sales volume. During market downturns, COLI has been one of the few developers to achieve market share growth, through focusing on landbank quality upgrades and opportunistic acquisitions.

We lower our fair value estimate on China Overseas Land & Investment, or COLI, to HKD 26.00 from HKD 31.00 following slower revenue booking and inventory absorption assumptions. First-half revenue fell 14.1% year on year, missing Refinitiv consensus, which we mainly ascribe to slower inventory clearance in lower-tier cities. Although we expect a material top-line improvement for the second half off a low base, we cut our 2023 forecast revenue and net profit by a respective 7.8% and 4.2%. In addition, we push back our inventory clearance assumption to 2027 on a prolonged negative homebuying sentiment. While management maintained its guidance for 2023 sales to grow 20%, we think this will only translate to bookings starting in 2025. Despite the valuation revision, COLI remains our top pick as its shares are trading at a 40% discount to our fair value estimate. We believe the market is underappreciating COLI’s robust landbank in wealthy regions and healthy margins, and view potential favorable policy measures as near-term catalysts for the firm.

As housing demand cools and credit growth slows, we believe the leverage-driven strong growth for China’s real estate developers is behind us. That said, we think large developers such as China Overseas Land & Investment, or COLI, will fare well as the industry consolidates, with smaller peers facing increasing liquidity constraints and slumping sales volume. During market downturns, COLI has been one of the few developers to achieve market share growth, through focusing on landbank quality upgrades and opportunistic acquisitions.

The Hong Kong market experienced a solid rally following the July 24 Politburo meeting, with the real estate stocks rebounding from recent losses. We believe signs of government support are positive but we would have liked to see more in addressing excess property inventory. We believe more details will emerge along with ongoing policy adjustments, but for the time being, our view remains that China’s real estate activity will recover gradually through 2025. As a result, we think risks remain in the sector with negative news likely to continue regarding possible defaults. There was no explicit language in the messages regarding financial support for the real estate developers. As such, we continue to prefer buying China Overseas Land & Investment over others given financial strength and an attractive project pipeline in Tier 1 and Tier 2 cities.

We are transferring coverage of China state-owned developers—namely China Overseas Land & Investment, or COLI; China Resources Land, or CR Land; and China Jinmao. While we maintain our fair value estimates of HKD 31.00 for COLI and HKD 43.00 for CR Land, we lower Jinmao’s to HKD 1.90 from HKD 2.40, due to more conservative estimates on gross margins through 2027. Amid recovering homebuyer confidence, we believe the property development revenue of the three developers will post a meaningful rebound in the next few years, leading to pickups in earnings off low bases in 2022. Also, we think large state-owned developers such as COLI and CR Land will fare better than peers in sales thanks to landbank replenishment in higher-tier cities, strong operating efficiency, and robust funding status. In our view, all three developers are undervalued as the market’s negative sentiment is unwarranted given improvement in their financial performances. Our top pick for the sector remains COLI.

As housing demand cools and credit growth slows, we believe the leverage-driven strong growth for China’s real estate developers is behind us. That said, we think large developers such as China Overseas Land & Investment, or COLI, will fare well as the industry consolidates, with smaller peers facing increasing liquidity constraints and slumping sales volume. During market downturns, COLI has been one of the few developers to achieve market share growth, through focusing on landbank quality upgrades and opportunistic acquisitions.

We are raising our fair value estimate for no-moat China Overseas Land & Investment, or COLI, to HKD 31.0 from HKD 29.0 after the firm reported business updates for the first quarter of 2023. Overall, COLI posted a low-teens percentage year-on-year revenue growth, with improvement in operating margins to 20.7% from 17.1% for same period last year. Previously reported robust first-quarter sales growth (excluding associates and joint ventures) has given us more confidence that the sound recovery of housing demand in higher-tier cities will continue to benefit COLI. As such, we moderately revised up our sales forecast for 2023-24, leading to higher revenue growth for 2025-26. In the short run, we also expect stronger top-line rebound under normalized delivery and faster inventory turnover. That said, we are more conservative on gross margins amid an overheating landbank market and have mildly cut our assumptions through 2027. Our updated fair value estimate implies a price/book ratio of 0.8 times for COLI, higher than the 0.5 times as of April 26, 2023. COLI remains our top pick of the sector, as we believe the market is underestimating its top line and profitability recovery potential.

We believe the leverage-driven strong growth for the real estate developers is behind us and the property sector is past its peak growth. This is exacerbated by the tightening policy environment and restricted credit growth to the property sector. The smaller and unlisted companies will face increasing liquidity constraints, prompting them to raise cash by cutting prices or selling projects. We expect China Overseas Land & Investment, or COLI, to fare well in this consolidation-heavy environment, becoming one of the few developers to successfully maintain growth by focusing on operational efficiency and opportunistic acquisitions.

No-moat China Overseas Land & Investment, or COLI, reported weak 2022 numbers with revenue dropping 26% year on year and net profit down 43%. However, we expect around 11% year-on-year growth in 2023-24 given sales recovery, normalizing delivery, and improving homebuyer confidence. We believe earnings have bottomed especially as the one-off write-downs of inventories and jointly developed projects and foreign exchange losses in 2022 are unlikely to be repeated in 2023 and are non-cash flow items. We foresee that COLI will post a meaningful 22.4% EPS growth in 2023 off a low base. We also like the countercyclical landbank acquisition by COLI with 85% of land premium allocated to higher-tier cities in 2022. That said, we are slightly more conservative on our long-run gross margin assumptions due to heightened land cost, which leads to a mild reduction in our fair value estimate to HKD 29 from HKD 30. At our valuation, COLI is trading at around 0.8 times price/book, a reasonable level compared with 0.5-1.2 times in 2019-2021. Also, we think long-term investors will find COLI attractive at the current share price level at its 5%-6% dividend yield.

We believe the leverage-driven strong growth for the real estate developers is behind us and the property sector is past its peak growth. This is exacerbated by the tightening policy environment and restricted credit growth to the property sector. The smaller and unlisted companies will face increasing liquidity constraints, prompting them to raise cash by cutting prices or selling projects. We expect China Overseas Land & Investment, or COLI, to fare well in this consolidation-heavy environment, becoming one of the few developers to successfully maintain growth by focusing on operational efficiency and opportunistic acquisitions.

We lift our fair value estimate for no-moat COLI to HKD 30 from HKD 26 following December sales that reflect the slowly improving trend off the worst of its sales activity seen in first-half 2022. We estimate revenue should come in about 15% above our original projection to CNY 203.7 billion, a 15.9% year-on-year drop. This carries over to a 7% uptick in our 2023 revenue forecast to CNY 227.3 billion, but we would still not expect COLI to return to its 2021 revenue level until 2024. Revaluation losses may eat into earnings but barring these, we expect COLI's 2022 earnings per share to decline 33.5% with operating profit margin to slip 100 basis points to 20.8%. COLI's long-standing policy of focusing on projects in China's larger and wealthier cities has benefited the company, as sales have held up better than that in lower-tiered cities.