新城控股(601155)

Future Land-A registered 57% yoy growth in core earnings, with lower-thanexpectedrevenue expansion but higher-than-expected gross margins.

Its FY19 sales target of Rmb270bn (+22% yoy) looks conservative.Meanwhile, its rental income is experiencing rapid growth.

Maintain Add with higher TP of Rmb38.50.

Solid FY18 earnings

Future Land-A’s FY18 core earnings rose by 57% yoy to Rmb8bn, 8% below our forecaston lower-than-expected revenue growth but gross margins came in higher than expected.It declared a final DPS of Rmb1.50, +85% yoy and representing a 32% payout.

Conservative sales target for FY19F

Future Land-A’s FY18 contracted sales were Rmb221bn, +75% yoy. Management set asales target of Rmb270bn for FY19 (+22% yoy). This looks conservative given plannedsaleable resources of Rmb500bn, implying a mere 54% sell-through rate. With its amplecurrent landbank of 110m sq m with total saleable resources of over Rmb1tr, we expectFuture-A’s contracted sales to continue to grow at a faster-than-average pace over thenext few years.

Investment properties continue to experience rapid growth

Its rental income from shopping malls surged 117% yoy to Rmb2.2bn in FY18, propelledby the contribution of 19 new malls and organic growth of 23 existing malls. Given itsstrong pipeline, management expects Future Land-A’s shopping mall count to increasefrom 42 currently to 80 by 2019 and to 102 by 2021 with total GFA of 6m sq m. Weestimate its rental income could reach Rmb4bn in 2019 and Rmb10bn by 2021.

Gross margins may see some pressure in FY20-21F

Future Land-A’s gross margin post-land appreciation tax (LAT) expanded to 30% in FY18from 28% in FY17, thanks to a strong property market during FY16-17. We expect thegross margin to remain largely stable in FY19F. Meanwhile, management said it offereddiscounts of up to 15% on its products in tier-3 and -4 cities from Sep to Dec 2018, whichcould translate into lower margins in FY20-21F, in our view. We forecast post-LAT grossmargins of 27%/22% in FY20/21F.

Maintain Add with a higher TP of Rmb38.50

We raise FY19-20F EPS by 3-13% to factor in faster revenue growth. Our new TP ofRmb38.50 remains based on 7.7x forward P/E (its average since listing in 2015).Maintain Add. Key catalysts include stronger-than-expected contracted sales and rentalincome growth. Key risks are weak property markets in tier-3/-4 cities and a slowdown inChina’s economy.