China's largest commercial real estate operator, Wanda Commercial, recently announced interim results. The company's revenue for the first half of the year increased 33% year on year to RMB 30.9 billion, and core net profit increased sharply by 117% from last year's low base to RMB 2.3 billion. Gross margin was slightly lower than the first half of last year by 0.6 percentage points to 44.3%, but it is still significantly higher than the industry average of about 25%. The core net interest rate increased from 4.5% in the first half of 2014 to 7.3% during the same period, but it still lags significantly behind the 16.3% net interest rate level in the second half of 2014. The main reason is that the settlement revenue from property sales in the first half of the year was small (settlement revenue for the first half of the year was only 21 billion yuan, which is expected to be at least 100 billion yuan for the whole year), resulting in a very large share of interest that the company's huge total of 3.8 billion yuan was not capitalized. As a result of the company's IPO in the Hong Kong market at the end of last year, the increase in core earnings per share was slightly smaller than the total net profit, up 79% year over year to RMB 0.5. The company did not pay an interim dividend. Of the operating income of 30.9 billion yuan in the first half of the year, property sales revenue was 21 billion yuan (up 29% year on year), property rental revenue was 6.3 billion yuan (up 31% year on year), and hotel operating income was 2.2 billion yuan (up 26% year on year). The gross margin level of property sales during the same period rose from 39.1% last year to 39.5% this year, and the gross margin of the leasing business increased from 73.6% to 74.3%, but the gross margin of the hotel management business fell from 29% to 23.9%, mainly due to the large number of new hotels opened from the second half of last year to the first half of this year (16 in total). This increased the total number of hotels operated by the company nationwide to 64 and the total number of guest rooms increased to 19713 by the end of June this year. During the same period, the number of Wanda Plaza shopping centers opened by Wanda Plaza nationwide was further increased to 112, with a total construction area and a net leasable area of 18 million square meters and 12 million square meters, respectively. In the first half of the year, the average rental rate of all shopping centers in operation was 98.1%, a slight decrease of 1.2 percentage points from 99.3% in the full year of 2014, but the average monthly rent per square meter rose 8% from 89.8 yuan to 97.3 yuan. Regarding the withdrawal of Wanda Department Store, which was widely reported by the media some time ago, the company's management revealed during the meeting that the withdrawal of the two relatively old business formats, Wanda Department Store and Big Star Karaoke, from Wanda Plaza began at the beginning of the year. According to the company plan, only 20 of the 89 pop stars in Wanda Plaza will remain in the KTV industry. The remaining 69 companies will all be adjusted, and the efficiency is expected to increase by about 40%. However, for about 100 Wanda department stores, 50 will remain, and 50 others will be adjusted, improving efficiency by about 40%. As for the entire adjustment plan, the company will gradually advance by city, and after the overall plan is finalized, it will be announced to the public. The company's cash on hand declined from 93 billion yuan at the end of 2014 to 58 billion yuan at the end of June due to large construction capital expenditure and sales of properties in the first half of the year (61 billion yuan in the first half of the year, compared with the annual target of 168 billion yuan), but total interest-bearing debt also declined slightly from 181 billion yuan to 174 billion yuan at the end of June. The company's net equity ratio rose to 74% from 57% at the end of the year, but is still lower than 88% in the middle of last year. Considering the growth rate of contract sales in the second half of the year, management said that the company's debt ratio will be lower than in the medium term by the end of this year, while it is expected to drop to around 60% by the end of next year. At the same time, the continuous decline in financing costs is undoubtedly a huge benefit for Wanda Business, which has a large debt scale. The company's management said that the average financing cost has now exceeded 7% and is expected to be close to 6% by the end of the year. It was only in August that the company issued 10 billion yuan of medium-term notes in the Chinese interbank market (the 5-year coupon interest rate is only 4.6%, the current total amount is 15 billion yuan; the company plans to use 12.8 billion yuan to replace old bonds with higher interest levels), then publicly issued the first 5 billion yuan corporate bond on the Shanghai Stock Exchange yesterday, with a 5-year coupon interest rate of 4.09% (the total amount approved this time is also 15 billion yuan). Furthermore, it is worth noting that Wanda is the company that holds the smallest total size and proportion of foreign currency debt among its peers. Currently, the foreign debt ratio accounts for only 8% of total debt. At the mid-August shareholders' meeting, the company approved an A-share issuance plan, with no more than 12 billion yuan of financing. The proposed issuance price was then adjusted from RMB 40 per share to RMB 48 per share (the issue price of H shares at the end of last year was HK$48). Management said that although the A-share IPO is currently suspended, the company plans to submit an application in early September at the latest in order to get ahead and get qualified as soon as possible. If A shares are successfully issued, the company's total equity capital will increase to close to 4.8 billion shares, including 4.13 billion A shares (including 250 million newly issued A shares and 3.88 billion from domestic shares to A shares) and 653 million H shares. Although Wanda is undergoing a transformation from an asset-heavy to an asset-light model, in the next three years, we believe that the company will still benefit from its original business entering a period of rapid growth. We expect that property sales revenue will not drop significantly in the next three years during the transformation process, while rental income from property ownership will grow at an average annual rate of 30%. At the same time, although Wanda's capital expenditure was still heavy during this period, at a time when overall liquidity is abundant, especially the domestic debt financing market, is so efficient and low-cost, we don't think Wanda will face capital risks. The company's current stock price is equivalent to 9.5 times 15 years PE, 1.0 times 15 years PB, and 48% net asset value discount. We maintain the company's buying rating. The target price for 12 months was slightly adjusted to HK$64.4 (equivalent to a 30% net asset value discount). This is about 34% higher than the current stock price. We maintain Wanda's commercial buying rating.