Gross margin high base for 1H24E
　　COLI’s 1H24 contracted sales outperformed almost all peers with a smaller YoY decline at 17.6%. This was still larger than we previously estimated as the property market corrected more than expected. COLI has higher proportion of projects that are sold and booked simultaneously, as such, we expect 1H24E revenue to decline by c.10%.
　　We expect gross margin to be similar to the 18.5% for 2H23, lower than the 22.6% in 1H23. As such, we expect 1H24 core net profit to decline by c.20%. The decline for FY24E should be less as high base in margin will fade in 2H. As a result, we cut our 2024-26E core EPS by 14.5-14.6%, respectively, and cut our TP by 12.6%. COLI is likely to continue to deliver stronger contracted sales catalyst than peers. Also considering <40% net gearing and 0.4x 2024E P/B, we reiterate BUY rating.
　　Key Factors for Rating
　　COLI’s 1H24 contracted sales amounted to RMB148bn, representing 17.6% YoY decline, which is the second best performance among all China developers we track. In particular, its June contracted sales surged by 40.6% YoY, largely outperforming the vast majority of peers, underpinned by the launch of some key projects in Shenzhen, Shanghai and Beijing. We calculated that there are still over RMB30bn worth of saleable resources from these key projects for 2H24, which would help COLI to continue outperforming peers, and to further narrow the overall YoY of contracted sales. n After topping the rank in terms of land spending in 2023 with around 60% invested in tier-1 cities, COLI slowed down land spending in 1H24 as it has already built up ample high quality saleable resources. In 1H24, attributable land spending amounted to RMB12bn, among which 65% was invested in the tier-1 city of Beijing. With the conservative landbanking, we expect COLI’s net gearing to remain below 40%. COLI normally ramps up land spending in 2H, as the land market often cools down during 2H.
　　We expect gross margin in 1H24 to remain stable compared to 2H23 at 18-19%.
　　Our previous estimation was higher given that end-2023 unbooked revenue is with higher gross margin of 20%. However, as property price corrected more than expected, gross margin of projects which sold and booked simultaneously during 1H24 was hit by more than expected. Gross margin of contracted sales going forward may start to improve if ASP stabilises, as more projects acquired from 2H21 onwards with lower cost start to be launched.
　　Key Risks for Rating
　　Recovery of property market may be slower than expected
　　Valuation
　　We lowered our estimated NAV by 7.1% to HK$21.49/share given lower margin, and expanded our target discount to NAV from 15% to 20% given slower recovery in the market. The stock currently trades at 0.4x 2024E P/B, and 38% discount to our estimated NAV, which we see as attractive given COLI’s high quality landbank, strong contracted sales performance, and solid financial position.