1H18 results beat our expectations riding on higher-than-expected GFAdelivered. Top line increased by 59.8% YoY to RMB300,348 mn in 1H18.Underlying net profit increased 21.0% YoY to RMB28,454 mn.
Contracted sales will remain high but growth rate may gradually fall.During Jan.-Aug. 2018, contracted sales amounted to RMB385.09 bn,increasing 19.7% YoY, achieving 70.0% of its 2018 sales target. Contractedsales growth rate might slow down riding on decreasing land scale and fallingsale-through rate. In addition, contracted liabilities decreased to RMB176,531mn as at 30 Jun. 2018.
We expect a high gross margin level. The Company's unit land costamounted to RMB1,683 per sq.m., 16.0% of ASP during Jan.-Aug. 2018.Gross margin is expected to remain at around 35.3% in 2018-2020.
Evergrande’s operating risks should gradually decrease alongsidebalance sheet enhancement and stable profitability. The net gearing ratiowill gradually decrease from 183.7% in 2017 to 66.3% in 2020.
The Company’s fundamentals should improve. However, its valuation shouldnot be attractive. Overall, we revise down target price from HK$30.17 toHK$28.79, which represents a 35% discount to the Company’s revised 2018ENAV of HK$44.30 per share, 8.9x underlying 2018 PER and 2.4x 2018 PBR.We downgrade to "Accumulate". Risks: lower-than-expected house salesand listing failure for Evergrande’s property development business on theA-share market.