China Overseas Grand Oceans Group:In line with expectations,underlying margin still trending lower

What surprised us

    COGO’s underlying profit was up 16% yoy in 1H13 to HK$1.34bn, in linewith expectations as it accounted for 48%/47% of FY13 GSe andBloomberg consensus. Highlight: (1) 1H13 revenue rose 56% yoy on theback ofan 170% yoy increase of GFA delivery. However, earnings growthlagged behind on further underlying margin decline, down 4pp from 2H12level to 17% despite a slight recovery in GPM to 33% from 30%, due tohigher land appreciation tax (4% of 1H13 revenue vs. a tax rebate in 2H12).

    (2)We expect limited upside risk to management’s 30% yoy earningsgrowth target given total unbooked presales were HK$7.4bn as of end-1H13, implying 94%/0% revenue lock-in for 13E/14E, below peers avg of99%/43%, respectively. (3)COGO only entered into one new city with totalGFA1.5mn sqm additions in 1H, or 36% of FY13 acquisition target. Mgmtremains confident in achieving 4mn sqm land acquisition in FY13 given itshealthy balance sheet (11% net gearing at end-1H). (4)1H new starts ofGFA1.43mn sqm reached 72% of FY13 target. Mgmt thus expects 2Hsaleable resources to be c.20% higher (HK$20bn) than previous guidance,but kept its FY13 presales target unchanged at HK$17bn.

    What to do with the stock

    Our 13E-15E underlying EPS is largely unchanged at HK$1.13/1.33/1.43 andwe maintain our 12-m NAV based TP of HK$10.6. COGO is trading at 30%discount to NAV, 8.2X 2013E P/E and 2.0X 2013E P/B vs. H-share coverageavg of 49%/7.5X/1.1X, respectively. Retain Neutral. Risks: upside: Upbeatpresales performance and margins; downside: earnings growthdisappointment leading to reduction of valuation premium.