China Merchants Land issued a profit warning in January. The company's actual core profit in 2015 was 334 million yuan (RMB, same below), down 12% from the previous year, but still higher than our forecast of 229 million yuan

We expect core earnings in 2016 to increase 1.4 times year-on-year, driven by a large number of project completion

We reaffirm the purchase rating, target price of HK$1.5. Potential catalysts for the revaluation include a 34% year-on-year increase in contract sales and the parent company or asset injection, etc.

Core profit fell 12% in 2015, but was still 46% higher than our forecast

The main reason for the decline in China Merchants Land's core earnings in 2015 was the delay in project completion. However, the main reason for the decline in net profit (51% year-on-year) exceeding the decline in core profit was the exchange loss of 156 million yuan caused by the company's foreign currency debt of about 5.9 billion yuan. The company's revenue reached 6.4 billion yuan, 19% higher than our forecast, so the core profit was 46% higher than our forecast. Gross margin was 24.4%, down 3.5 percentage points from the previous year, mainly due to carry-over accounts from Nanjing projects with low profit margins (accounting for 61% of 2015 revenue). The net debt ratio is 69%, which is roughly in line with expectations.

The outlook for 2016 is promising

By the end of 2015, the company's cumulative unrecorded pre-sale revenue reached 9.7 billion yuan, an increase of 50% over the previous year, which will contribute to significant revenue and profit growth in 2016. Based on adjusted project accounting assumptions, we lowered our 2016-17 revenue forecast by 12%/8%, respectively, while increasing the gross margin forecast and lowering the profit forecast attributable to minority shareholders. After adjusting the various hypothetical factors, our adjusted profit forecast is basically the same as before the adjustment. Our core profit forecast for 2016 is 1.4 times higher year over year, mainly based on the assumption that the company has saleable resources of 26 billion yuan, and contract sales in 2016 are expected to reach 12 billion yuan, up 34% year on year, mainly from projects in Guangzhou and Foshan. China Merchants Land plans to issue RMB bonds to reduce the share of foreign exchange loans (2015:50%) and potential exchange losses.

Parent company or asset injection, valuable revaluation room

In 2016, the parent company either carried out asset injections, including projects in Hong Kong (we currently assume that the impact of any asset injection has not been considered), contract sales and profits increased significantly, or increased the company's room for revaluation. China Merchants Land's current valuation is a 1-year forward NAV discount of 53%. We maintain our buy rating and target price of HK$1.5, which is equivalent to a 1-year forward NAV discount of 36%, which is close to the company's historical average.