Company Reports

No-moat CR Land defied broad industry weakness by printing a respective 8% year-on-year growth in property development and investment revenue for first-half 2024. That said, we expect sluggish home presales starting in 2023 to weigh on its top line through 2025, leading to a mix shift to higher-margin nondevelopment recurring income. Property development’s gross margin worsened to 12.4% in the first half from 17.0% a year ago, partly offset by shopping malls’ gross margin increase. As such, we cut our revenue forecasts by 2%-11% for 2024-28 while lifting midcycle operating margin by 30 basis points to 22.0%, leading to an unchanged HKD 43.0 fair value estimate. CR Land remains one of our top picks in the China real estate sector given its resilient earnings and healthy balance sheet.

China Resources Land, or CR Land, is distinctive among leading Chinese real estate developers as it enjoys relatively large exposure to investment property businesses. Riding on the success of the MixC commercial complex, the high-end retail commercial projects in top cities of China, CR Land is transitioning from predominantly developing residential properties to expanding mixed-use projects, including shopping malls, offices and hotels. As residential project sales continue to underpin CR Land’s cash inflow, we expect the firm to add to its investment property portfolio with strong recurring income and healthy profitability in higher-tier cities. We assume that non-property-development income will grow at a five-year CAGR of 9.8% and represents around 20% of the firm’s revenue in 2028 Also, the fast-growing investment properties imply increasing visibility of recycling capital through REIT listing in China.

We view the recent favorable measures for the China real estate sector, including the scrapping of buying curbs in wealthy cities and the unwinding of the mortgage rates floor, as encouraging to homebuyers and investors. That said, we caution that potential buyers may remain on the sidelines amid falling home prices, and policy tailwinds will likely require a longer time to translate into a pickup in home sales. Additionally, although the CNY 500 billion in loans—backed by a relending facility from China’s central bank—to local state-owned enterprises for converting completed but unsold properties to affordable units should help clear excess inventory, execution risks remain, in our view. While the policy-induced rally has reflected the market sentiment shift, we maintain the valuations of stocks under our coverage, given industry fundamentals that are still weak. Despite a more demanding sector valuation, we think shares of state-owned developers such as China Overseas Land & Investment and China Resources Land remain attractive. We continue to prefer both names, given their more resilient contracted sales and better financial strength.

We retain our fair value estimate for China Resources Land, or CR Land, at HKD 43 per share following its impressive 2023 results, underpinned by respective top-line year-on-year growths of 20% and 26% for its property development and recurring businesses—mainly property investment and management. While the firm’s residential properties saw strong bookings for 2023, we expect the revenue growth to slow in 2024 as home sales remain weak. Nonetheless, we foresee an accelerating inventory turnover through 2028 as homebuyers continue to trust CR Land’s project quality. Additionally, shopping mall rental and property management income should keep expanding amid rollout in top cities, in our view. This would also enhance the company’s profitability, as margins for recurring income have largely exceeded that for property development. While we raise our weighted average cost of capital assumption to 10.0% from 9.6% given higher financial risks, this has a limited impact on our valuation as our midcycle operating margin forecast of about 22% is unchanged. Despite the recent runup, we view CR Land’s shares as cheap and think the market is still overlooking the company's robust earnings and financial strength.

China Resources Land, or CR Land, is distinctive among leading Chinese real estate developers as it enjoys relatively large exposure to investment property businesses. Riding on the success of the MixC commercial complex, the high-end retail commercial projects in top cities of China, CR Land is transitioning from predominantly developing residential properties to expanding mixed-use projects, including shopping malls, offices and hotels. As residential project sales continue to underpin CR Land’s cash inflow, we expect the firm to add to its investment property portfolio with strong recurring income and healthy profitability in higher-tier cities. We assume that non-property-development income will grow at a five-year CAGR of 9.8% and represents around 20% of the firm’s revenue in 2028 Also, the fast-growing investment properties imply increasing visibility of recycling capital through REIT listing in China.

We published our inaugural China real estate industry pulse for the first quarter of 2024 with the view that housing demand should gradually recover through 2026, supported by ongoing policy tailwinds. While new home sales in China remained sluggish in 2023, the nationwide average price was steadier due to a continuing mix shift to wealthier regions with more resilient prices. Moreover, we like the ramping-up of supportive measures since the second half of 2023 and expect further easing in buying restrictions and mortgage rate cuts in large cities. While share price performances could remain volatile in the near term, we see an improving risk/reward profile at the current valuation as the market may be missing key developers' improving sales outlooks. As such, we prefer top state-owned builders, China Overseas Land & Investment and China Resources Land, as both have seen better sales growth, higher asset quality, and healthier gearing ratios versus their peers.

China Resources Land, or CR Land, is distinctive among leading Chinese real estate developers as it enjoys relatively large exposure to investment property businesses. Riding on the success of the MixC commercial complex, the high-end retail commercial projects in top cities of China, CR Land is transitioning from predominantly developing residential properties to expanding mixed-use projects, including shopping malls, offices and hotels. As residential project sales continue to underpin CR Land’s cash inflow, we expect the firm to add to its investment property portfolio with strong recurring income and healthy profitability in higher-tier cities. We assume that investment property income will represent over 9% of the firm’s revenue with an 11.8% CAGR through 2027. Also, the fast-growing investment properties imply increasing visibility of recycling capital through REIT listing in China.

We keep our fair value estimates for China Resources Land, or CRL, at HKD 43.00, and China Vanke at CNY 21.00 (HKD 23.90) per share, but lower China Jinmao's to HKD 1.50 from HKD 1.90, mainly on a lower gross margin forecast for 2023. All three developers saw first-half 2023 top-line year-on-year declines in property development, which we think were mainly due to slower inventory clearance and a lingering downcycle for project completion. This was partially offset by robust growth in recurring income from investment properties, driven by recovery in retail sales, and foot traffic. Also, the three developers’ key commercial projects saw margin improvement as occupancy and rental rates rose. Although we expect property development earnings to be sluggish in 2023, demand rebound under policy tailwinds should translate into better margins over the next few years. While these three developers and China Overseas Land & Investment, or COLI, which reported earlier, are trading at 4-stars currently, we like CRL and COLI best, given their presence in wealthy cities and outstanding financial strength.

The Hong Kong market experienced a solid rally following the July 24 Politburo meeting, with the real estate stocks rebounding from recent losses. We believe signs of government support are positive but we would have liked to see more in addressing excess property inventory. We believe more details will emerge along with ongoing policy adjustments, but for the time being, our view remains that China’s real estate activity will recover gradually through 2025. As a result, we think risks remain in the sector with negative news likely to continue regarding possible defaults. There was no explicit language in the messages regarding financial support for the real estate developers. As such, we continue to prefer buying China Overseas Land & Investment over others given financial strength and an attractive project pipeline in Tier 1 and Tier 2 cities.

We are transferring coverage of China state-owned developers—namely China Overseas Land & Investment, or COLI; China Resources Land, or CR Land; and China Jinmao. While we maintain our fair value estimates of HKD 31.00 for COLI and HKD 43.00 for CR Land, we lower Jinmao’s to HKD 1.90 from HKD 2.40, due to more conservative estimates on gross margins through 2027. Amid recovering homebuyer confidence, we believe the property development revenue of the three developers will post a meaningful rebound in the next few years, leading to pickups in earnings off low bases in 2022. Also, we think large state-owned developers such as COLI and CR Land will fare better than peers in sales thanks to landbank replenishment in higher-tier cities, strong operating efficiency, and robust funding status. In our view, all three developers are undervalued as the market’s negative sentiment is unwarranted given improvement in their financial performances. Our top pick for the sector remains COLI.

China Resources Land, or CR Land, is distinctive among leading Chinese real estate developers as it enjoys relatively large exposure to investment property businesses. Riding on the success of the MixC commercial complex, the high-end retail commercial projects in top cities of China, CR Land is transitioning from predominantly developing residential properties to expanding mixed-use projects, including shopping malls, offices and hotels. As residential project sales continue to underpin CR Land’s cash inflow, we expect the firm to add to its investment property portfolio with strong recurring income and healthy profitability in higher-tier cities. We assume that investment property income will represent over 9% of the firm’s revenue with an 11.8% CAGR through 2027. Also, the fast-growing investment properties imply increasing visibility of recycling capital through REIT listing in China.

China Resources Land’s, or CR Land’s, 2022 performance was in line with our expectation and we keep our fair value estimate at HKD 43. Our earnings forecast is little changed. We expect generally favorable market reaction to CR Land’s affirmation for growth in sales and profit for 2023. CR Land's management acknowledges the rising segregation in China’s real estate industry among financially stronger property developers that can afford to acquire quality land bank and projects versus others. We think this will lead to a better earnings growth outlook for CR Land and peer China Overseas Land & Investment, especially given both companies’ focus on Tier 1 and better located Tier 2 city projects. CR Land remains one of our preferred China real estate companies. At our fair value, CR Land trades at 1.0 times price/book, which is in line with its historical range.

China Resources Land, or CR Land, remains unique among China's large real estate developers as is the only one with a material investment property business. Riding on the success of the Shenzhen MixC, arguably the most successful commercial project in a highly visible and competitive city, CR Land aims to transition from a predominantly residential developer into one known for developing and expanding large-scale, mixed-use projects. The residential development business provides the necessary fuel to power this growth as the company progressively builds up a recurrent income investment portfolio. We expect rental income to average annual growth of over 16% through 2026 and to make up 10% of group revenue in 2026.

After pushing some revenue to 2023 from 2022 and raising working capital needs slightly, our fair value estimate for China Resources Land, or CR Land, is marginally lowered to HKD 43 from HKD 44. We continue to like CR Land at this share price level and see the developer as a key beneficiary of a recovery in China's real estate market, especially given its strong financial position and access to prime landbank. CR Land hasn't released its February contracted sales data yet, but we expect a continuation of the positive trend in its precontracted sales, which were up 5% year on year in value terms in January 2023. This marks a return to growth that is in line with the broader industry, part of which is due to the low base in 2022, but also as the lifting of lockdowns is allowing visitors to property launch showrooms, which we think will boost sales.

China Resources Land, or CR Land, remains unique among China's large real estate developers as is the only one with a material investment property business. Riding on the success of the Shenzhen MixC, arguably the most successful commercial project in a highly visible and competitive city, CR Land aims to transition from a predominantly residential developer into one known for developing and expanding large-scale, mixed-use projects. The residential development business provides the necessary fuel to power this growth as the company progressively builds up a recurrent income investment portfolio. We expect rental income to average annual growth of over 16% through 2026 and to make up 10% of group revenue in 2026.

The Chinese government has over the past few days laid out plans to support the real estate sector, leading to sharp share price gains for the real estate developers. While we think the recent policy moves are in the right direction to assuage debt risks, we believe more is needed, which we hope will materialize over the next six months. We think the initiatives are supportive of the share prices in the near term, but we maintain our view that we need to see a return of homebuyers’ confidence to support contracted sales, as this is essential for a durable improvement in the developers’ credit environment. We think indebted developers may see a lag in the return of buyers’ confidence compared with that for financially stronger companies. At this stage, we maintain our view for revenue and profit to trough in 2023 for the sector, but we see financial positions improving during the year. The policy support doesn’t change our view that state-owned developers, such as China Overseas Land and Investment, or COLI, and China Resources Land, or CRL, should still be best positioned to pick up reasonably priced landbank given their stronger balance sheets, which gives them a competitive edge in future projects.

Four China developers under coverage—Country Garden, China Jinmao, China Resources Land, and Agile—released first-half results at the end of the reporting period. The results takeaways support our continued preference for state-owned enterprise, or SOE developers. Bellwether Country Garden headlines the challenge to private developers, weighed by the weak property market, in which Country Garden’s first-half earnings are severely affected by the slowdown in project deliveries and continued margin disappointment. The weakness in its results were similarly observed in private developer Agile’s first-half result. On the flip side, the results of SOE developers, China Jinmao and China Resources Land, or CRL, are still showing steady results. This is consistent with China Overseas Land & Investment, or COLI, which reported first-half results earlier.

China Resources Land, or CRL is unique among Chinese real estate developers. Among large-cap developers, CRL is the only one with a credible investment property business. Riding on the success of the Shenzhen MixC, arguably the most successful commercial project in a highly visible and competitive city, CRL aims to transition from a predominantly residential developer into one known for developing and expanding large-scale, mixed-use projects. The residential development business provides the necessary fuel to power this growth as the company progressively builds up a recurrent income investment portfolio. Historically, the company has benefited from a nearly annual asset injection from its parent company at a discount to NAV. However, asset injections may be coming to an end. Hence, the company may experience some challenges ahead as it wades into the competitive land auction market.

China real estate activity has been weak through the first half of 2022, in line with our earlier expectations for the physical market weakness to persist. Despite green shoots of recovery in June, the pace of recovery, however, may be hampered by the start-stop zero-COVID-19 policy that likely limits the positive impact of policy easing. We differ from the market view that easing policies in the form of lower mortgage rates are adequate to support rapid recovery once lockdowns recede. Instead, we believe that healing the developers' access to credit is key to longer-term recovery. We expect any recovery to be slow as we do not expect a quick rebound in homebuyer confidence, and we think homebuyers will be selective. Support from financial institutions for onshore debt backed by derivatives for some developers strikes the liquidity issue at its heart—however, it has not lifted markets. Action in the bond market implies that investors remain concerned with the long-term debt repayment ability of some developers, especially if presales activities remain at a slower pace. Lenders may also be choosy, capping the abilities of some developers to expand.

China Resources Land, or CRL is unique among Chinese real estate developers. Among large-cap developers, CRL is the only one with a credible investment property business. Riding on the success of the Shenzhen MixC, arguably the most successful commercial project in a highly visible and competitive city, CRL aims to transition from a predominantly residential developer into one known for developing and expanding large-scale, mixed-use projects. The residential development business provides the necessary fuel to power this growth as the company progressively builds up a recurrent income investment portfolio. Historically, the company has benefited from a nearly annual asset injection from its parent company at a discount to NAV. However, asset injections may be coming to an end. Hence, the company may experience some challenges ahead as it wades into the competitive land auction market.