2019 results beat market expectation
Core net profit grew 36.8% YoY to Rmb5.2bn in 2019, exceeding market expectations, mainly due to accelerated project delivery. Full year dividend was Rmb0.74/sh, implying a stable and generous payout ratio of 45% on core net profit.
Resource value strengthened. Total resource value of landbank came to Rmb510bn at end-2019, with favorable geography （50% in Greater Bay Area, over 30% in Yangtze River Delta and Jing-jin-ji） and attractive land cost （about 30% of ASP）。 KWG has also locked in 26 urban renewal projects with potential saleable resources of about Rmb585bn. We expect conversion of 60-70mn sqm GFA in 2020.
Trends to watch
2020 sales target of Rmb103bn （+20% YoY） is achievable. KWG plans for product supply of Rmb170bn in 2020 （+21% YoY）。 We think its sound layout （70% in Greater Bay Area and Yangtze River Delta） should sustain a resilient sell-through rate of 60%.
Solid earnings growth ahead. We project core net profit of Rmb6.3bn in 2020 （+22% YoY） and Rmb7.7bn in 2021 （+22% YoY）。Unbooked sales at end-2019 （Rmb63.5bn on an attributable basis） could cover roughly 80% of our earnings estimates for 2020-2021.
Maturing multi-business ecology. KWG had 18 investment properties in operation that generated operating income of Rmb2.43bn in 2019 （+49% YoY）。 For property management sector, we estimate around 25mn sqm of managed-GFA by end-2019 （about 20% in commercial properties） and revenue of Rmb1bn in 2019. We think the platform’s fair value equals about HK$1.7 per KWG’s outstanding share under conservative estimates. A spin-off is likely to be finished in 2H20.
Financials and valuation
We raise our 2020 earnings 2% to Rmb6.3bn （+22% YoY） on delivery changes. Keep 2021 earnings of Rmb7.7bn （+22% YoY）。 We maintain OUTPERFORM and TP of HK$13.6 （30% NAV discount, 5.9x 2020e P/E, 31% upside）。 Potential spin-off of KWG’s property management arm might serve as additional catalyst. The company is now trading at 4.5x and 3.7x 2020e and 2021e P/E and 47% NAV discount.
Risks
2020 sales and earnings fall below our expectation.