CICC Reaffirms 'Outperform' on China Resources Land, Sees 61% Upside

China International Capital Corporation (CICC) has reaffirmed its 'Outperform' rating for property developer China Resources Land (01109.HK), maintaining a price target of HK$46.7 per share. In a research note, the bank highlighted the company's resilient core business and steady growth in other segments, suggesting the stock presents a potential investment opportunity once market sentiment stabilizes after a recent sector-wide correction. The price target implies a potential upside of 61% from the stock's current level.

First-Half Results in Line with Expectations

According to CICC, China Resources Land's first-half 2024 performance met the bank's forecasts. The company reported a 2% year-over-year increase in core net profit to ¥10.16 billion, even as total revenue declined 29% to ¥67.9 billion. The revenue dip was primarily attributed to a 39% drop in development property sales, which was partially offset by a 17% increase in rental income from its investment properties.

The developer's settlement gross margin improved by 1.4 percentage points to 25.4%, driven by changes in the mix of properties sold. The company maintained its interim dividend at ¥0.20 per share, unchanged from the previous year.

Financial Stability and Segment Strength

CICC's report emphasized the developer's sound financial position, a key differentiator in China's challenged real estate market. The bank noted several key metrics:

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• The net gearing ratio stood at a healthy 41.0%.
• The weighted average financing cost was just 2.63%, having decreased by 9 basis points from the start of the year.
• Interest-bearing debt fell by 3.7% from the beginning of the year to ¥271.2 billion.

China Resources Land's core property development business, its 'first growth curve', demonstrated resilience with contracted sales rising 6% year-over-year to ¥116.5 billion, outperforming many of its peers. Meanwhile, its 'second curve'—investment properties like shopping malls—showed strong momentum, with rental income growing 19.4% to ¥12.44 billion, significantly outpacing broader retail sales growth.

Outlook and Risks

Looking ahead, CICC believes the company is well-positioned to maintain its top-three market share in sales, supported by an ample land bank with approximately ¥500 billion in unsold value. The bank kept its earnings forecasts for 2024 and 2025 unchanged.

However, the report also identified potential risks to its outlook. These include a greater-than-expected downturn in the new housing market and rental growth from its investment property portfolio falling short of projections.