Gemdale:Expense ratios fell sharply on better management efficiency

Better management efficiency led to a major drop in expense ratios

    In 9M16, revenue came to Rmb25.5bn (+63% YoY), net profit attributable to theparent was Rmb1.7bn (+106% YoY), and EPS was Rmb0.38, in line with our estimatebut higher than consensus. 9M16 gross margin was 29%, down 1ppt from 9M15.However, a noticeable improvement in management efficiency caused the ratio ofselling, administrative & finance expenses to revenue to fall sharply, to 6.3%, down5.8ppt from the same time last year. As a result, net margin attributable to the parentrose to 6.7% despite a 41% YoY fall in net investment income.

    9M16 sales grew 84% YoY

    9M16 sales were Rmb71.9bn and GFA sold was 4.54m sqm, up 84% and 58% YoY.ASP rose to Rmb16k/sqm. September sales came to Rmb11.2bn with GFA sold of 620ksqm, up 73% and 36% YoY, respectively. Gemdale's sales growth visibly outpaced theindustry, as its projects are concentrated in tier 1 and 2 cities.

    Land purchasing stayed cautious

    9M16 land purchases were Rmb13.6bn, amounting to GFA of 2.64m sqm, down 32%and 16% YoY, respectively. Notably, Gemdale was the only leading property developerto reduce its land purchases. The company now has Rmb21bn of cash and equivalentson its books and its short-term solvency ratio has risen to 1.8. The company intends tohold onto its cash and wait for a correction in land prices, and we look favourably onthis sound approach to operations.

    Valuation: Maintain Buy rating and Rmb17.59 PT

    Our 2016-18E EPS are unchanged at Rmb1.23/1.31/1.35. The current share priceimplies 9.6x 2016E PE and represents a 30% discount to NAV. We derive ourRmb17.59 price target based on 14x 2016E PE. We are positive on Gemdale's prudentfinancing and land purchase policies and operating strategy of aggressive new-startsand sales. We maintain our Buy rating.