Earnings to grow 54% YoY in 2019 with possible profit alert
We expect core net profit of Rmb3.96bn （+53.9% YoY） in 2019 and a payout ratio of 40%, implying a yield of 5.8% on current valuation.
Mixed aspects in growth quality. We expect resilient sales GPM of 27-28% in 2019, with solid average stake of over 80%. However, we think selling expense could see a visible increase, given that certain tier-3/-4 cities are under more sell-through pressure.
Moderate pace in land banking. We expect total land replenishment of around Rmb180bn in 2019, bringing total saleable resources to around Rmb290bn at end-2019 （vs. supply of Rmb240bn likely needed in 2020）. We think Aoyuan had 60 urban renewal projects at end-2019 （from 30 at end-1H19）， with potential saleable resources approaching Rmb500bn. However, these projects could deliver limited accretion to land bank over the short-to-medium term, given an ordinary project conversion cycle of 3-5 years.
Financials to be slightly more stretched. We expect net gearing ratio of around 75% at end-2019 （64% in 1H19, 59% in 2018）， or 70% if excluding effects from investment in AEON Life Insurance.
Trends to watch
Sales may grow around 20% YoY in 2020. Sales reached Rmb118bn in 2019 （+29% YoY）. In 2020, we expect the roughly 26% growth in saleable resources to Rmb240bn （including potential land purchase in 1Q20） to lend major support.
Earnings growth to gradually normalize. We project earnings growth of 52% YoY in 2020 to Rmb6bn. We think earnings growth may normalize to around 30% in 2021, given the slowdown in sales growth.
Valuation and recommendation
Keep earnings forecast, OUTPERFORM and TP of HK$13.84 （8.4x/5.6x 2019e/20e P/E, 27% NAV discount and 7% upside） given solid earnings growth in 2019-20. Stock now trades at 8x/5x 2019e/20e P/E, and 31% NAV discount. We think current valuation is almost fair and expect stock price to see volatility in the short term.
Risks
2019 earnings missing our expectations.