The Company's contracted sales will grow fast alongside abundant landbank concentrated in higher-tier cities. The Company's land bank value isequivalent to over RMB500.00 bn. In addition, around 52% of its total landbank is exposed in prime areas of tier-1 and tier-2 cities.
We expect that profitability will rally with controllable solvency risk.Gross margin is expected to remain at around 26.9% between 2018 and2020, considering that unit land cost amounted to approximately RMB6,463per sq.m., 30.0% of ASP during Jan.-Oct. 2018. Incremental cash collectionand slowing pace in land replenishment will make net gearing ratio diminish to106.1% in 2020.
1H18 underlying net profit was in line with our expectation. Underlying netprofit in 1H18 surged up 110.3% YoY to RMB1,417 mn. We revise up 2018F,and 2020F underlying net profit slightly by 0.3% and 4.4% to RMB3,488mn and RMB6,354 mn, respectively but revised down 2019F underlyingnet profit by 9.8% to RMB4,488 mn.
The Company's fundamentals will improve gradually. However, alongside ahigh leverage ratio, the Company should justify a high NAV discount.Growth rate decline in contracted sales with RMB depreciation will bring somedownside pressures on the Company's valuation. Thus, we revise downtarget price from HK$16.55 to HK$14.16, which represents a 64% discount to2018E NAV of HK$39.35 per share and implies 5.7x 2018 underlying PERand 1.4x 2018 PBR. We maintain "Buy". Risks: lower-than-expectedcontracted sales and solvency risks.