State-owned developer Poly Real Estate released its 2017 interim results after issuing a positive profit forecast at the end of July, which is basically in line with our expectations. We maintain the company's target price at HK $4.90 and maintain our buy rating.

Interim results. In the first half of this year, the company realized a 47% year-on-year increase in revenue to HK $14.7 billion, in line with our expectations. In the same period, net profit increased nearly tenfold from HK $56 million in the first half of last year to HK $629 million. The main reasons are: 1) other income increased by 155% from HK $173 million in the first half of last year to HK $440 million in the first half of this year. 2) the performance of the joint venture company increased from a loss of 11 million Hong Kong dollars in the first half of last year to a gain of 42 million Hong Kong dollars in the first half of this year; 3) the contribution of deferred tax from negative 5 million Hong Kong dollars in the first half of last year to positive 15 million Hong Kong dollars in the first half of this year. As a result, while the company's gross profit margin remained stable at 17%, its net profit margin rebounded significantly from 0.6% in the first half of last year to 4.3% in the first half of this year.

The company's core net profit per share in the first half of this year was HK $0.17, compared with HK $0.016 in the same period last year, and as in previous years, it did not declare an interim dividend. In addition, the company's net debt ratio fell slightly from 108 per cent at the end of last year to 101 per cent in the middle of this year, still at a high level in the industry.

Contract sales. In the first half of this year, the company realized contract sales of 22 billion yuan (up 31% from the same period last year), with a contract sales area of 153 million square meters (up 6% from the same period last year), and an average sales price of 14500 yuan per square meter (up 23% from the same period last year). The company's year-on-year growth rate of 31% in the first half of this year ranks lower in the middle of the core listed developers we cover, with an average year-on-year growth rate of 56% compared with the same period. However, compared with the company's annual contract sales target of 35 billion yuan (unchanged from 2016), 64% has been completed, and the average completion rate of the sector over the same period is 60%. In accordance with the company's set full-year contract sales target, we expect its sales growth to decline by 28% in the second half of this year compared with the same period last year.

Land reserve. The company added seven new projects in the first half of this year, with a cumulative new construction area of 256 million square meters, which are located in Jinan (2 projects), Suzhou, Ningbo, Deqing, Nanning and London. According to our calculations, about 40% of the company's land reserves are located in third-and fourth-tier cities and are expected to benefit from the strong recovery in these regions so far this year.

Looking forward to 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.

Keep buying. We maintain our core net profit per share forecast of HK $0.14 (up 535%), HK $0.20 (up 43%) and HK $0.22 (up 11%) for 2017-2019, respectively. In view of the fact that we raised the company's net asset value from HK $6.88 to HK $7.00 at the end of July, we maintain the target net asset value discount of 30% and the target price of HK $4.90. Considering that there is about 27% upside in the current stock price compared with the newer target price, we maintain Poly's home purchase rating.