With an improving land bank structure and energy-saving andenvironmentally friendly pipelines, we think that the Company'scontracted sales will maintain upside momentum. During Jan.-Sep.2016, Modern Land's contracted sales recorded RMB12,411 bn, up 72.2%YoY.
We expect Modern Land's margins to remain stable. The Company'sgross margins are expected to remain at around 24.5% between 2016 and2018 due to its quality land bank and updated energy-saving and heatingand cooling systems. We also expect funding costs to decline further.
Modern Land's 1H16 underlying net profit beat our expectation. Totalrevenue soared by 118.6% YoY to RMB4,271 mn. Underlying net profitjumped by 88.1% YoY to RMB437 mn. To reflect policy tightening, werevise down the underlying net profit forecasts by 3.4%, 25.1% and30.7% to RMB754 mn, RMB766 mn and RMB884 mn in 2016, 2017 and2018, respectively.
Maintain “Buy”. The Company's valuation remains low. However, policytightening and RMB depreciation expectation should exert negative effectson the Company's valuation. Therefore, we revise down our target price fromHK$2.26 to HK$1.81, which represents a 35% discount to 2016E NAV ofHK$2.78 per share and implies 4.3x 2016 underlying PER and 0.8x 2016PBR.