2018 earnings miss market consensus
KWG’s core net profit grew 8% YoY to Rmb3.8bn （core diluted EPSRmb1.2）， 13% below consensus. Full year DPS was Rmb0.56 for 46.5%payout ratio and 7.5% yield.
Insufficient control over associate & JV projects weighed onearnings. In 2018, 3 projects with estimated core net profit ofRmb500mn were not delivered. Low consolidation （52% in 2018） ledto a reduced capitalization rate （76.7% in 2018, YoY down 13ppt）。
Solid balance sheet. Net gearing was 65% as of 2018, a slight 3pptdown from the end-2017. Average funding cost inched up 0.6ppt YoYto 6.4% in 2018.
Trends to watch
2019 Sales target should be feasible by capitalizing on GBA and YRD’
exposure. The company aims for Rmb150bn saleable resources （YoY+36%） and Rmb85bn sales （YoY +30%）。 Given 72% of its saleableresources are located in GBA and YZD, we believe a resilient sellthrough （60% achieved in 2018） is likely.
Earnings recovery might be underscored by abundant unbookedsales. We expect earnings of Rmb5.45bn in 2019 （YoY +43%）。 Existingunbooked sales amounted to Rmb48bn （on an attributable basis）with estimated GPM of 32-33%. Assuming a neutral 50% to bebooked in 2019, 60% of estimated earnings should be covered.
Additionally, KWG is aiming for 40% YoY growth in GFA completion tosecure deliveries.
Earnings forecast
Maintain 2019e earnings forecast unchanged. Introduce 2020e corenet profit of Rmb7.0bn （YoY +28%）。
Valuation and recommendation
The stock is trading at 4.4x/3.4x 2019e/20e P/E and 55% discount to2019e NAV. Reiterate BUY and TP of HK$10.4 （22% upside, at5.3x/4.2x 2019e/20e P/E and 45% NAV discount） to reflect its landresources value, still solid growth and attractive valuation. However,we expect a lack of encouraging catalysts before the company’sdeliveries of 2019-20 become more visible. Risks: 2019 deliveries andearnings miss our expectation.