Expect earnings to grow 20% YoY in 1H20 despite high base ; likely beating market expectations given active delivery
Strong top line to support earnings. China Overseas Grand Oceans Group (COGO) recorded abundant unbooked GFA of 8.32mn sqm at end-2019 (1.6x GFA sold in 2019), with GPM of 25–30%. We expect booked GPM to normalize at around 30% in 1H20 (down 5ppt YoY, but still better than peers), thus weighing on earnings. However, we also expect strong top line expansion of 30–40% YoY on active delivery to partly offset the negative effect.
Resuming ambitious land banking; expanding balance sheet. GFA acquired was 2.2x GFA sold in 5M20, well above the rate over 2018– 2019 (around 1.2x). New land parcels are concentrated in strong tier-3 cities with decent attributable portion of 92%. We estimate that such parcels will generate an average GPM exceeding 25%, given that around 20–30% of the acquisitions were from non-public sources. Thus, we expect net gearing increase in 1H20 and 2020, but it should remain well below 60% (vs. 16% in 2019).
Trends to watch
Expect sales to rise of 30% YoY in 2020 to Rmb70bn. Thanks to active land banking and new starts YTD, we expect COGO to expand saleable resources to Rmb130bn (from Rmb110bn), an increase of 39% vs full year 2019. We estimate that sales will rise 4% YoY in 1H20 to more than Rmb25bn (36% of our full-year estimate).
Expect earnings to grow about 30% YoY in 2020 to Rmb4.2bn. In addition to the aforementioned unbooked sales, we expect sales in 2020 to be sufficient to boost earnings. Moreover, we expect sales GPM to sustain at 25–30%, as the ASP YTD contract sales have risen 7% YTD, lending extra support to bottom line.
Valuation and recommendation
We maintain our earnings forecasts and OUTPERFORM rating. We raise our TP 9% to HK$6.21 (4.5x 2020e P/E, 43% NAV discount) offering 29% upside on improved market sentiment. COGO is trading at 3.5x 2020e P/E and 56% NAV discount. We expect the firm to hold an analyst briefing in August following the announcement of interim results, further improving transparency, and enhancing investor expectations and confidence.
Risks
Sales and earnings miss our expectations.