Earnings to grow 30% YoY in 2019
We project 2019 core net profit of Rmb5bn （+30% YoY） and a payout ratio of 35-40%, implying a yield of 5.2-6.0% on current price.
Stable financial position. Land purchase was prudent in 2019 （total cost below 35% of sales）， and we expect a net gearing ratio of around 75% at end-2019 （77% at end-1H19）. Average funding cost is likely to remain stable （6.6% at end-1H19）.
Trends to watch
Sizable and quality land bank. Saleable resources at end-1H19 （we estimate about Rmb420bn） is sufficient for 3 years of sales. Overall land bank has favorable regional layout （55% of saleable resources in Greater Bay Area and Yangtze River Delta） and decent GPM （we estimate 32-33%）. KWG also has potential GFA of 11mn sqm of urban redevelopment projects by end-1H19, and we expect 0.4-0.5mn sqm in Guangzhou to see successful conversion in 1H20.
Sales to see continued expansion. Sales were Rmb86bn in 2019 （a CAGR of 44% over 2016-2019）. KWG aims for supply of Rmb180bn and sales of Rmb110bn in 2020 （+28% YoY）. We also think KWG is less affected by the novel coronavirus pneumonia （NCP） due to its geographical layout, and therefore has higher visibility in executing new launches and sales.
Earnings to see more intensive release. We project core net profit of Rmb5.0bn in 2019 （+30% YoY）， Rmb6.2bn in 2020 （+25% YoY）， and Rmb7.8bn in 2021 （+25% YoY）. A decent amount of unbooked sales was accumulated at end-1H19 （Rmb54bn on attributable basis） due to a lag in delivery in 2018.
Valuation and recommendation
Keep earnings forecast. Introduce 2021 earnings of Rmb7.8bn （+25% YoY）. Keep OUTPERFORM and lift TP 24% to HK$13.6 （6x 2020e P/E, 30% NAV discount and 16% upside） given improved visibility in earnings release and rollover in valuation multiple. KWG is trading at 5.2x/4.1x 2020e/2021e P/E and a 40% NAV discount, which we think is partially supported by potential spin-off of its property management arm in 2H20 （we think fair value is above HK$1 if applied to each outstanding share of KWG, under conservative estimates）.
Risks
2019 earnings miss our expectations. Spin-off of property management platform sees significant delay.