1H15 EPS +20.2% YoY to Rmb0.83, slightly beating expectations

    In 1H15, China Merchants Property Development (CMPD) reported operating revenue +12.0% YoY to Rmb17.97bn and net profit +20.2% YoY to Rmb2.15bn or Rmb0.83/sh, slightly higher than expected.

    Earnings rose rapidly as settlement accelerated. I n 1H15, real estate settlement revenue was Rmb16.45bn (+12% YoY) and GFA settled was 1.33mn sqm (+ 23% YoY ); the a verage settlement price was Rmb12,368/sqm ( - 8.8% YoY ) . Settlement gross margin of projects in N orthern China (after tax) fell 21ppt and dragged overall settlement gross margin by 3ppt YoY to 23% as a large number of these projects catered for rigid demand, and the amortization of the B eijing Guangying Zhengyuan cut gross profit by Rmb152mn.

    Sound sales . I n 1H15, contracted sales were Rmb20.56mn (+14.9% YoY) and contracted GFA were 1.567mn sqm (+ 29.6% YoY ); a dvances received +24.5% YoY to Rmb44.33bn vs. early - 2015, with Rmb4.74bn from Shenzhen Shuangxi Garden, Rmb3.75bn from Nanjing Yonghuafu, Rmb3.69bn from Beijing Guangying Zhenyuan and Rmb3.11bn from Shenzhen Pingshan Huayuan Ci ty.

    Investment income mainly came from consolidation of Beijing Guangying. I n 1H15, investment income surged 244.1% YoY to Rmb490mn as it consolidated its 34% stake in Bei jing Guangying, recognized Rmb430mn inventory appreciation as investment income, and transferred Rmb11.78mn other owners’ equity as investment income.

    Financial conditions remained steady. As of end-1H15, net gearing ratio rose 7.3ppt vs. early-2015 to 40.6%; cash on hand was Rmb23.75bn, higher than the Rmb9.45bn of S- T loans and debts due within one year.

    Trends to watch

    Watch major shareholder’s resource consolidation. The Guangdong FTZ is advancing steadily. As a bellwether in Shekou (Shenzhen), CMPD is suspending trading as it consolidates China Merchants Shekou Industrial Zone Holdings, which plans to acquire CMPD via share swap and seek listing after the acquisition. We suggest paying attention to major shareholders’ resource consolidation in the future.

    Valuation and recommendation

    Maintain 2015/16e EPS forecast at Rmb1.95/Rmb2.22. CMPD’ s closing price before suspension of trading implies 16.4x/14.4x 2015/16e P/E and a 37% premium to the latest NAV. We maintain our BUY rating and keep CMPD-A’s TP at Rmb38.5 and CMPD-B’s TP at HK$27.5.

    Risks

    Macroeconomic downturn.