Results Review Hong Kong 1H18 results announced on 21 Aug 2018 were above expectations 22 August 2018 Property | Real Estate Buy (Maintained) China Resources Land Target Price: HKD33.00 Price: HKD28.60 A Counter-Cyclical Developer Market Cap: USD25,208m Bloomberg Ticker: 1109 HK Maintain BUY with new HKD33.00 TP from HKD31.50, and 16% upside – Share Data based on the same 25% discount to end-FY18F ENAV of HKD44.00, from Avg Daily Turnover (HKD/USD) 326m/41.5m HKD42.00. We continue to like CRL’s sector-leading GPM, strong rental 52-wk Price low/high (HKD) 21.5 - 32.4 income growth and sector-low weighted average financing cost. It should help it to weather any threat from credit or policy tightening ahead. Also, Free Float (%) 39 abundant saleable resources offer high visibility for strong sales Shares outstanding (m) 6,931 performance, which we believe will allow CRL to finish 18.6% ahead of Estimated Return 16% FY18F sales target, equivalent to 42.7% YoY growth. Shareholders (%) Interim results beat. 1H18 recurring net profit came in stronger than our China Resources Holdings 61.2 expectations by 8.3% at CNY7.3bn, +151.8% YoY, thanks to further expansion in GPM of property develop business to 48.1% from 35% in 1H17. Net gearing rose to 52%, from 35.9% in 2H18 following more aggressive land replenishments in 1H18. China Resources Land’s announced an interim Share Performance (%) dividend of CNY0.11/share, up 30% YoY. YTD 1m 3m 6m 12m Sector-leading GPM with multiple years of visibility. Management Absolute 24.1 7.1 (5.0) (6.2) 24.1 reassured that properties pre-sold as at end-1H18 are set to be delivered in Relative 31.4 8.8 6.2 5.5 21.9 2H18F and FY19F-20F shall command GPM of not less than 45%, 40% and Source: Bloomberg 35%. Strong GPMs would be largely supported by the booking of property sales in Tier-1 and strong Tier-2 cities in Southern and Eastern China, in our view. China Resources Land (1109 HK) Price Close Relative to Hang Seng Index (RHS) Abundant saleable resources in 2H18 to drive annual sales. With CNY277bn saleable resources in 2H18F, we are confident that CRL shall ride 30 116 on the probable loosening pre-sale approvals and report CNY217bn contracted 25 98 sales (+42.7% YoY, 18.6% ahead of sales target). 20 80 70 Mature IP portfolio plus sector-low finance cost add defensiveness. We 60 50 like CRL’s shopping mall portfolios with high occupancy rate and visible retail 40 sales growth, which should translate into stable growth in rental income. With 30 20 19 new malls to be launched in 2018-2020, the CNY100bn rental income target 10 Volm 17 18 18 18 17 for FY20F appears to be highly feasible. Coupled with sector-low financing cost 17 - - - - - - Jul Oct Apr Feb Dec of 4.4% and an average debt maturity of 3.9 years, CRL should continue to Aug deliver steady, counter-cyclical growth, amid the tightening cycle. Source: Bloomberg Reiterate BUY with a new HKD33.00 TP, based on the same 25% discount to end-FY18F ENAV of HKD44.00 (from HKD42.00). We raise earnings forecasts by 8-13% for FY18-20, and also incorporated our new earnings forecasts, following CRL’s adjustment of its reporting currency to CNY from HKD, as well as to factor in our new GPM forecasts. Forecasts and Valuations Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Total turnover (CNYm) 109,328 118,588 132,088 166,782 222,247 Reported net profit (CNYm) 19,501 23,017 24,113 25,560 29,891 Recurring net profit (CNYm) 16,274 19,156 22,567 25,560 29,891 Recurring net profit growth (%) 13.9 17.7 17.8 13.3 16.9 Analysts Recurring EPS (CNY) 2.35 2.76 3.25 3.68 4.30 Toni Ho CFA DPS (CNY) 0.70 0.97 0.88 0.99 1.16 +852 2103 5888 Recurring P/E (x) 10.6 9.0 7.7 6.8 5.8 P/B (x) 1.48 1.44 1.25 1.11 0.97 [email protected] Dividend Yield (%) 2.8 3.9 3.5 4.0 4.7 Return on average equity (%) 16.8 19.5 18.7 17.4 17.9 Angelo Wong Return on average assets (%) 4.7 5.1 4.5 4.1 4.3 Net debt to equity (%) 23.8 35.6 44.6 47.9 55.4 +852 2103 9218 Our vs consensus EPS (adjusted) [email protected] Source: Company data, RHB See important disclosures at the end of this report 1 Powered by the EFA Platform China Resources Land Hong Kong Results Review 22 August 2018 Property | Real Estate Financial Exhibits Financial model updated on : 2018-08-21 Asia Financial summary Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Hong Kong Recurring EPS (CNY) 2.35 2.76 3.25 3.68 4.30 Property EPS (CNY) 2.81 3.32 3.48 3.68 4.30 China Resources Land DPS (CNY) 0.70 0.97 0.88 0.99 1.16 Bloomberg 1109 HK BVPS (CNY) 16.8 17.3 19.9 22.5 25.6 Buy Weighted avg adjusted shares (m) 6,931 6,931 6,938 6,945 6,952 Valuation basis Valuation metrics Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Based on 25% discount to CRL's end-FY18F ENAV of Recurring P/E (x) 10.6 9.0 7.7 6.8 5.8 HKD44.00 P/E (x) 8.85 7.50 7.17 6.77 5.79 P/B (x) 1.48 1.44 1.25 1.11 0.97 Key drivers FCF Yield (%) 2.7 (7.4) 3.8 (11.0) (9.3) Both contracted sales growth and GPM recovery Dividend Yield (%) 2.8 3.9 3.5 4.0 4.7 EV/EBITDA (x) 2.19 2.08 2.49 2.61 2.69 Key risks EV/EBIT (x) 2.23 2.11 2.53 2.65 2.73 Tightening measures in Tier-1 cities, especially Shenzhen Income statement (CNYm) Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Company Profile Total turnover 109,328 118,588 132,088 166,782 222,247 China Resources Land is the real estate flagship of Gross profit 36,889 47,737 54,490 63,968 77,894 China Resources Group, which currently holds 61.3% EBITDA 32,941 41,278 50,009 59,352 73,710 stake in CRL. It is one of the leading property Depreciation and amortisation (537) (654) (785) (726) (852) developers in China, engaged in both residential and Operating profit 32,404 40,624 49,224 58,626 72,858 commercial property development businesses. The Net interest 552 (746) (977) (863) (1,301) “MIXC” brand is well-known as high-end metropolitan complexes. As of end-2017, CRL's landbank had total Income from associates & JVs 601 236 687 865 1,158 gross floor area (GFA) of 50.0m sqm and covers over Exceptional income - net 4,831 5,980 2,061 0 0 50 cities. It was listed on the Hong Kong Stock Pre-tax profit 38,387 46,094 50,995 58,627 72,715 Exchange (HKEx) in Nov 1996, and has been one of Taxation (15,888) (20,686) (24,241) (29,731) (38,379) the Hang Seng Index's (HSI) constituent stocks since Mar 2010. Minority interests (2,998) (2,392) (2,642) (3,336) (4,445) Recurring net profit 16,274 19,156 22,567 25,560 29,891 Cash flow (CNYm) Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Change in working capital (10,080) (30,300) (14,611) (39,778) (41,312) Cash flow from operations 6,782 (10,381) 6,541 (16,688) (13,784) Capex (2,100) (2,400) 0 (2,402) (2,402) Cash flow from investing activities (7,691) (6,467) (4,960) (7,610) (7,871) Dividends paid (3,975) (4,879) (6,702) (6,093) (6,901) Cash flow from financing activities 525 25,121 13,298 19,907 26,899 Cash at beginning of period 45,886 45,502 53,774 68,652 64,261 Net change in cash (384) 8,272 14,878 (4,391) 5,244 Ending balance cash 45,502 53,774 68,652 64,261 69,505 Balance sheet (CNYm) Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Total cash and equivalents 46,674 53,774 68,652 64,261 69,505 Tangible fixed assets 9,031 8,345 9,683 11,359 12,909 Total investments 105,207 112,707 118,354 124,427 131,054 Total other assets 14,862 25,299 26,443 26,443 26,443 Total assets 427,045 480,451 602,066 654,267 746,404 Short-term debt 11,988 25,256 24,629 30,584 38,325 Total long-term debt 67,763 79,899 117,546 123,151 149,209 Other liabilities 16,015 16,489 16,574 16,733 17,038 Total liabilities 287,886 336,210 437,165 467,371 533,242 Shareholders' equity 116,438 119,718 137,738 156,397 178,217 Minority interests 22,721 24,522 27,164 30,499 34,944 Total equity 139,159 144,240 164,902 186,896 213,161 Net debt 33,077 51,380 73,523 89,474 118,030 Total liabilities & equity 427,045 480,451 602,066 654,267 746,404 Key metrics Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Revenue growth (%) 5.2 8.5 11.4 26.3 33.3 Recurrent EPS growth (%) 11.1 17.7 17.7 13.2 16.8 Gross margin (%) 33.7 40.3 41.3 38.4 35.0 Operating EBITDA margin (%) 30.1 34.8 37.9 35.6 33.2 Net profit margin (%) 17.8 19.4 18.3 15.3 13.4 Dividend payout ratio (%) 25.0 29.1 25.3 27.0 27.0 Capex/sales (%) 1.9 2.0 0.0 1.4 1.1 Interest cover (x) 168 27 26 29 30 Source: Company data, RHB See important disclosures at the end of this report 2 China Resources Land Hong Kong Results Review 22 August 2018 Property | Real Estate 1H18 Results Review Figure 1: CRL's 1H18 results review Source: RHB See important disclosures at the end of this report 3 China Resources Land Hong Kong Results Review 22 August 2018 Property | Real Estate Earnings Forecast Revisions Figure 2: Changes to our P&L forecasts Source: RHB See important disclosures at the end of this report 4 China Resources Land Hong Kong Results Review 22 August 2018 Property | Real Estate Figure 3: CRL's interim income statement Source: RHB See important disclosures at the end of this report 5 China Resources Land Hong Kong Results Review 22 August 2018 Property | Real Estate Figure 4: CR Land's annual income statement Source: RHB See important disclosures at the end of this report 6 China Resources Land Hong Kong Results Review 22 August 2018 Property | Real Estate Valuation And Recommendation Figure 5: CRL's end-FY18F ENAV Source: RHB Figure 6: CRL's 5-year rolling forward ENAV band Source: RHB Figure 7: China property – 10-year ENAV discount band Source: RHB See important disclosures at the end of this report 7 China Resources Land Hong Kong Results Review 22 August 2018 Property | Real Estate Peer Comparison Figure 8: Peer valuation comparison table I