2018 underlying net profit missed our expectation onlower-than-expected GFA delivered. Top line increased 13.3% YoY toRMB34,367 mn. Underlying net profit in 2018 was up 56.2% YoY toRMB2,041 mn.
The Company's contracted sales will grow steadily but at a slower rate. Sales target and saleable resources for 2019 are expected to reach RMB 140bn （indicating 14.9% YoY growth） and RMB 200 bn （indicating 70.0% targetsale-through rate）， respectively.
We expect steady gross margin and controllable solvency risk, but highcapital stress to remain. Gross margin is expected to remain at around26.0% between 2019 and 2021, considering that unit land cost amounted toapproximately RMB6,356 per sq.m., 29.5% of ASP during Jan.-Mar. 2019. Incremental cash collection and slowing pace in land replenishment will makenet gearing ratio diminish to 95.7% in 2021. However, as at the end of 2018,the Company’s cash could not cover its short-term debts.
The company plans to optimize its capital structure with the sacrifice ofexpansion rate. Alongside a high leverage ratio, the Company should justify ahigh NAV discount. However, the Company's valuation at the current time hascompletely factored in the high financing stress and the decline in contractedsales growth. Thus, we revise up target price from HK$14.16 to HK$15.69,which represents a 60% discount to 2019E NAV of HK$39.22 per share andimplies 6.1x 2019 underlying PER and 1.7x 2019 PBR. We maintain "Buy".
Risks: lower-than-expected contracted sales and solvency risks.