1H19 results beat consensus
KWG announced 1H19 results: Core net profit grew 28.1% YoY toRmb2.5bn. Interim dividend was 40% of core net profit, for a DPS ofRmb0.32 （+28% YoY） and an attractive yield of 5.5%.
Active delivery supported earnings despite lack of office disposalgain. Total proportionate revenue grew 68.7% YoY to Rmb17.1bn,partially due to a strong 78% growth from JCE （to Rmb6.4bn）。
Financial risks controllable. Net gearing ratio was 77% by end-1H19（65% at end-2018）。 Average funding cost was 6.6% （6.4% atend-2018）。 Cash on hand was 4.75x short-term debt at end-1H19,and short-term debt was 14% of total borrowing.
Trends to watch
We think 2019 sales target of Rmb85bn （+30% YoY） might beachievable. Sales were Rmb36bn in 1H19, 42% of full-year target（behind peer average of 48%）。 Saleable resources in 2H19 come toRmb100bn, with 88% in tier-1/2 cities, which should provide support.
In addition, we think potential disposal of Beijing KWG Center in4Q19 （yielding sales of around Rmb2bn） might provide extracontribution.
Sound earnings growth over 2019–2020. We project core net profitof Rmb4.8bn in 2019 （+25% YoY） and Rmb6.2bn in 2020 （+30% YoY）。
Apart from active delivery, we think the potential booking of officesales （like Beijing KWG Center） should lend support.
Financials and valuation
We cut 2019 and 2020 earnings forecast by 4% and 3% to Rmb4.8bn（+25% YoY） and Rmb6.2bn （+30% YoY） on changes in other income.
Keep OUTPERFORM, but cut TP by 9% to HK$8.71 （5.2x 2019e and4x 2020e P/E, 50% NAV discount, 32% upside） mainly on EPSchanges. Stock now trades at an attractive 3.9x 2019e and 3x 2020eP/E, and 62% NAV discount.
Risks
2019 sales and earnings missing our expectations.