Gemdale:Prudential financial and land~purchasing policies;we agree with aggressive new starts and selling

Outstanding management skills substantially lowered expense ratio

    H116revenue/net profit attributable to the parent increased 74%/49% YoY toRmb14bn/770m, respectively (settled gross floor area up 66% YoY to 1.19m sqm),beating consensus. However, H116gross margin fell 3.8ppts to 24.4% due to a highshare of low-margin projects. Gemdale did a good job of cost control, with its selling,administrative and financing expense ratio down 7.6ppts YoY to 7.2% in H116, whichdrove up H116net margin to 9.2%. However, a 40% minority interest pushed downnet margin attributable to the parent to 5.9%, which we expect to recover in H216dueto higher gross margins of settled projects and a lower minority interest.

    Prudential financial and land-purchasing policies; aggressive new-starts/selling

    The net debt to asset ratio in H116was 32% and weighted average funding cost wasonly 4.8%. Gemdale prudently purchased Rmb9.7bn of land in total, including onlyRmb3.2bn of attributable land cost, or a small stake of 33%. Land cost posted negativegrowth and Gemdale diversified its risks by acquiring land with partners. The companyraised full-year 2016new starts to 5.40m sqm from 5.00m sqm. Gemdale recordedsales value/sales volume of Rmb439m/2.89m sqm in H116, up 107%/67%,respectively. We agree with its operating strategies.

    Park, property management and foreign segments grew steadily

    Gemdale Property and Investment, in which Gemdale holds a 41% stake, completedthe acquisition of 50% of shares in Guangdian Property Development, obtaining theopportunity to develop landbank of 5m sqm with Guangdian. Gemdale PropertyManagement (GPM) provides service to 70m sqm of real estate and generated revenueof Rmb700m in H116. GPM launched ienjoys.com, its Internet platform, in H116.However, we think GPM needs to find ways to boost profit, as gross margin at thesegment was only 8% in H1. Gemdale has built a presence in New York, Boston, SanFrancisco and Los Angeles, with 200,000sqm of projects ready for lease or sale.

    Valuation: Maintain Buy and price target of Rmb17.59

    We derive our price target of Rmb17.59based on 14.3x 2016E PE. We are positive onGemdale's prudential financing and land purchase policies and operating strategies ofaggressive new-starts and sales. We maintain our Buy rating.