1H18 core net profit in line with expectationEvergrande announced 1H18 results. Revenue rose 60% YoY toRmb300bn. Attributable core NP （as adjusted by CICC） rose 73% YoYto Rmb32bn, for a core diluted EPS of Rmb2.43.
Substantial deliveries boost earnings growth. Property developmentrevenue surged 61% YoY to Rmb294.8bn, providing a firm foundationfor bottom-line performance.
Generous dividend payout makes up for FY16 and FY17. Aftersuspending dividends in FY16 and FY17, Evergrande declared adividend payment of HK$1.287/sh, paying out 50% of attributable netprofits from FY16 and FY17, implying a 4.4% yield.
Deleveraging well underway. Net gearing ratio dropped 56ppt fromend-2017 to 127% in 1H18. Strong earnings enhanced equity andland acquisition slowed, with land premium incurred coming to only15% of sales in 1H18.
Trends to watch
Shrinking sales deposits may pose overhang for 2019 earnings. Thefirm’s balance dropped 34% from end-2017 to Rmb176.5bn in 1H18.
Sales expected to rise 30% to Rmb650bn in 2018. Despite abundantsellable resources of Rmb1trn this year, we expect sell-through rateto drop amid widespread cooling of low-tier city markets.
Non-development business needs more time and effort tocontribute meaningfully. On aggregate, non-development businessstill contributed only 2% of Evergrande’s revenue in 1H18.
Earnings forecast
Maintain FY18 core NP forecast and trim FY19 core NP estimate 4%to Rmb52.1bn （+15% YoY） to reflect reduced sales deposits.
Valuation and recommendation
The stock is trading at 7.0x 2018e and 6.1x 2019e P/E. Maintain HOLDand target price of HK$32.64 （10% upside; 7.9x 2018e P/E）。
Risks
Tier-3/-4 cities property market sales could beat our expectations.