Earnings expected to grow 14.8% YoY in 1H19
We expect KWG’s core net profit to grow 14.8% YoY in 1H19 toRmb2.25bn. We think the company lacks sufficient disposal gainsfrom en-bloc office sales （like Guangzhou’s project in 1H18） in 1H19,but might temporarily rely on active delivery （proportionate revenueup 30% YoY to Rmb13.2bn on low base） to support its bottom line.
Financial risks controllable. Land purchase was active in 1H19 （totalland cost was 60% of sales） and we expect a net gearing ratio above70% by end-1H19 （65% at end-2018）。 We think the average financingcost might edge up, but to a small extent.
Trends to watch
We think 2019 sales target of Rmb85bn （+30% YoY） might beachieved. Sales grew 11% YoY in 1H19 to Rmb36bn, 42% of full-yeartarget. In 2H19, we expect more abundant new product supply （60%of full-year amount） to support sales. By month, we project sales ofRmb7–8bn in July, and over Rmb8bn in the rest of 2019.
Tepid earnings growth in 2019; improvement possible in 2020. Weexpect core net profit growth of 30% YoY in 2019 （to Rmb4.9bn） onlow base, partially due to a lag in shared profits contribution. Wethink shared profits might pick up in 2020, and help deliver solidearnings growth without a heavy increase in the top line. Rmb48bn inunbooked sales at end-2018, with GPM of 32–33%, could provideextra support.
Valuation and recommendation
We lower our 2019 and 2020 earnings estimates by 9% and 8% toRmb4.9bn （+30% YoY） and Rmb6.4bn （+30% YoY）， reflectingadjustments in revenue, margin and shared profits.
Keep OUTPERFORM; cut TP 8% to HK$9.56 （5.5x/4.2x 2019e/2020eP/E, 45% NAV discount, and 26% upside） mainly on EPS revisions.
The company trades at a defensive 4.4x/3.4x 2019e/2020e P/E, and56% NAV discount. We remain upbeat on KWG given its qualityresources in the Yangtze River Delta and the Greater Bay Area, butexpect short-term volatility in share price given uncertainties in 1H19and 2019 results.
Risks
2019 sales miss target; 2019 earnings fall below our expectation.