China Vanke:Improving sales visibility and 30%earnings CAGR

Buy for high earnings visibility and undemanding valuation

    We upgrade Vanke A to Buy from Hold and raise our TP by 22% to RMB31.21after factoring its strong 3Q17results and latest land acquisitions. We believeVanke can sustain its double-digit sales growth given its proactive landbankingand the potential JV with SZ Metro on the two Shenzhen projects. We forecastVanke to report 30% earnings CAGR with post-tax gross margin expanding to24-25% in FY17-19F. Also, we expect the privatization of GLP to be completedby April 2018, which should be a positive share price catalyst. The stock nowtrades at 8.4x FY18F P/E and 21% discount to NAV, which is undemandingversus peers given its high earnings visibility.

    Proactive landbanking and JV with SZ Metro to sustain double-digit growth

    Vanke has acquired 19.0mn sqm in 3Q17(including the asset package fromGD International Trust), which is 22% more than its landbanking in 1H17. Weestimate these projects could add ~RMB380bn of saleable resource with ~25%pre-tax gross margin on average (assuming no ASP increase). Also, Vanke isbidding for the two Shenzhen projects (1.8mn sqm GFA) auctioned by SZMetro (Vanke’s largest shareholder). We believe Vanke will likely win theauction and the gross margin would be >50%, if the auction price is similar tothe offer price that SZ Metro planned for exchange of Vanke’s shares before.Together with the other 40above-metro JV projects with SZ Metro under gooddiscussion, we believe Vanke can sustain double-digit sales growth in 2018F.

    Strong full-year results and GLP deal as positive catalysts

    We expect Vanke to report 30% earnings growth this year with post-tax grossmargin expanding to ~24% (vs. 20.3% in FY16), given there are RMB432bnunbooked sales by September. Also, the privatization of GLP is expected to becompleted before April 2018, which should provide synergy to Vanke’s existinglogistics property business as its long-term earnings driver. We believe thesetwo should be positive near-term catalysts for the share price.

    Strong 9M17results with margin expansion

    Vanke reported strong 9M17results with: 1) revenue staying flat atRMB117bn; 2) post-tax gross margin expanding to 23.7% (vs. 20.3% in FY16);3) core profits increasing 31% to RMB10.6bn; and 4) net gearing ratioincreasing to 38% (vs. 26% in FY16and 20% in 1H17).

    Valuation and risks

    Our TP is based on a 10% discount to end-2018F NAV of RMB34.68. The stocknow trades at 8.4x FY18F P/E and at a 21% NAV discount. Key risks: 1)Baoneng selling its shares in the secondary market, 2) slower property sales,and 3) failure to acquire quality sites.