State-owned developer Poly Real Estate issued a positive profit forecast on Thursday and expects the company's profit attributable to shareholders to rise sharply by 830% in the first half of this year compared with the same period a year earlier. We raised our target price from HK $4.13 to HK $4.90, maintaining our buy rating.

Profits have soared at low levels. According to the company's positive profit forecast, medium-term net profit is expected to increase 8.3 times, mainly due to an increase in gross profit driven by an increase in sales carry-over income and an increase in exchange earnings during the period. The company earned HK $0.016 per share in the middle of last year and HK $0.02 for the whole year. On this basis, the mid-17-year net profit is expected to increase to about HK $550 million, equivalent to HK $0.15 per share in the interim. We raised our revenue forecasts for 2017-2019 by 11 per cent, 16 per cent, to HK $36.5 billion (up 19 per cent), HK $40.1 billion (up 10 per cent) and HK $42.6 billion (up 6 per cent), respectively, and raised our 2017-2019 net income per share forecast to HK $0.24 per share from HK $0.21 to HK $0.33.

The recovery of third-and fourth-tier cities has benefited. In the first half of this year, Poly Real Estate achieved contract sales of 24 billion yuan, with a 42 per cent year-on-year growth rate of 42 per cent among the core listed developers we covered, with an average year-on-year growth rate of 56 per cent over the same period. However, compared with the company's annual contract sales target of 35 billion yuan (unchanged from 2016), it has been completed by 69%. About 40% of the company's land reserves are located in third-and fourth-tier cities, benefiting from a strong recovery in these regions so far this year.

We look forward to substantial progress in the restructuring. We upgraded the company to buy in December 2016 because we believe that the restructuring process between Poly property and Poly Real Estate is expected to accelerate. In the first half of this year, Poly Real Estate achieved contract sales of 147 billion yuan (up 33 per cent year-on-year), which lagged behind the average growth rate of the sector over the same period. And compared with the company's annual contract sales target of 300 billion yuan (up 43% from a year earlier), the completion rate in the first half of this year was only 49%. We believe that in the future, the internal integration of group real estate resources led by Poly Real Estate will continue to be promoted under the driving force of being bigger and stronger, and we look forward to seeing substantial progress in the second half of the year.

Maintain the buy rating. We raised the company's net asset value per share from HK $6.88 to HK $7.00. Taking into account the recent plate valuation repair, we narrowed its target net asset value discount from 40% to 30%, resulting in a new target price of HK $4.90 (compared to the original target price of HK $4.13). Considering that there is about 24% upside in the current stock price compared with the newer target price, we maintain Poly's home purchase rating.