Due to deeper-than-expected property market correction during 2024, we lowered our estimation for COLI’s revenue recognition and cut our 2024E revenue by 2.9%. We also reduced our 2024E gross margin from 19.4% to 18.0%, given the larger-than-expected drop in property price.
　　In addition, we increased our estimation for inventory impairment from RMB460m to RMB1bn. As such, we cut our 2024E core earnings by 10.1%, and cut our TP by 7% to HK$16.71. Supported by its largest land spending among peers in 2024 with over 70% concentration in tier-1 cities, we believe COLI will continue to outperform major peers in 2025 in terms of contracted sales just like in 2024. We estimate COLI’s strong cash collection is likely to further lower its net gearing and further solidify its advantageous position in the land market. We reiterate BUY rating on the stock.
　　Key Factors for Rating
　　COLI’s 2024 contracted sales amounted to RMB311bn, up 0.3% YoY, making the company one of the very few developers that delivered positive growth. As a comparison, most peers have recorded double-digit declines. In particular, December contracted sales surged 76.6% YoY to RMB40bn, among which c.RMB6bn came from the disposal of office properties. Even excluding that, December contracted sales would still grow by c.50% YoY.
Excluding COGO, COLI spent RMB80.6bn land premium in 2024 (attributable: RMB69.6bn), which already positioned itself as the number one company in terms of land spending in 2024. Including COGO, the total land spending amounted to RMB85.8bn (attributable: RMB71.6bn). 73% of its attributable land spending in 2024 are in tier-1 cities (71% counting COGO), up again from the 60% in 2023, further securing COLI’s superior landbank quality. Saleable resources from newly acquired projects amounted to over RMB150bn, the largest among all China developers according to CRIC, but still smaller than 2024 contracted sales. As such, we expect 2025 contracted sales to see some YoY decline.
Cash collection rate in 2024 was over 90%. Despite its high ranking in land spending, it was still conservative compared to past years. Therefore, we expect solid positive OCF in 2024E, and estimate net gearing ratio to further go down from end-2023’s 38.7%. Finance cost for new borrowings in 2024 was 2.6%, compared to existing average finance cost at 3.5% in 1H24.
　　Key Risks for Rating
　　Property market recovery may be slower than expected.
　　Valuation
　　We cut our estimated NAV by 7% to HK$18.57/share mainly due to the larger- than-expected property price drop. The stock currently trades at 0.3x 2024E P/B, and 32.7% discount to our estimated NAV. We see such valuation as attractive, given COLI’s superior land bank quality, outperforming contracted sales, and solid financial position.