Gemdale Corp:Unsustainable growth in land bank expense

Maintaining Sell as growth unlikely to sustain given diminishing land bank

    We maintain our Sell rating on Gemdale with the target price trimmed 5.9% toRMB9.32 after factoring in the FY16 results and the latest land acquisitions.We think the current valuation (among the highest in our coverage universe,with a 17% NAV discount and 11.2x FY17E P/E) is not justified given its weakgrowth outlook. Due to the change to the asset-light model, its diminishingland bank is unlikely to deliver sustainable growth, despite the low base in2015 resulting in a profit jump in 2016.

    Over 20% decline in attributable land bank from 2013 to 2016

    Since 2013, Gemdale has adopted an asset-light model. Its attributable landbank has dropped since then. In FY15 and FY16, the company acquired a totalof c.9.8msqm of land with attributable of only c.4.2msqm. As a result, itsattributable land bank at end-16 was 15msqm, about 21% less than 19msqmat end-13. Given the intense competition in the land market, it would bechallenging to replenish its land bank rapidly at reasonable prices.

    Sales and profit to drop, but valuations were above peers

    We are expecting revenue to drop by 22%/12%/7% from FY17E to 19E andflattish gross margin going forward. Our forecasts on its core profit inFY17E/18E/19E are -14%/+4%/-3% respectively. However, the ticker is tradingat a 17% discount to NAV, more expensive than 19% for Vanke-A and 31% forCOLI; its 11.2x FY17E P/E is also higher than 9.2x/6.7x for Vanke-A/COLI. Suchvaluation is not justified, in our view.

    2016 core profit up 210% due to low base effect

    Due to the low base of RMB1.67bn core net profit in 2015 (down 52% y-y), itscore net profit jumped 210% to RMB5.2bn. Revenue increased by 69% y-y,with gross margin improving by 2.4ppt to 25.4%. Gemdale proposed a finaldividend of RMB0.7/share, up 67% y-y, representing a 61% payout. Netgearing improved and decline 22ppt to 28%.

    Unjustified valuation at 11.2x FY17E P/E and 1.3x FY17E P/B

    Our lowered target price of RMB9.32 is based on a 30% discount to revisedNAV of RMB13.32/share (down from RMB14.15). Currently the ticker is tradingat a 17% NAV discount, 11.2x FY17E P/E and 1.3x FY17E P/B, which we thinkare not justified vs. peers’ valuations. Upside risks: 1) better-than-expectedsales and margin expansion; and 2) fast and good-quality land acquisitions.