China Vanke: Reinitiating With No Moat and Fair Value of CNY 21; Margins Rebound, but Growth Lags

We reinitiate coverage on China Vanke with a no-moat rating and a fair value estimate of CNY 21, or HKD 23.90, indicating a 2023 price/book ratio of 0.6 times. This trends below its prepandemic trading range as we modeled a slowing housing sales growth coupled with tempered improvement in asset turnover for the next five years. That said, our valuation suggests an over-40% upside to the A-share price as of May 29, 2023, as we believe that the gradual rebound in profit margins has not been fully priced in. With the resumption of homebuying activity in China and the rising mix of higher-margin investment property income, we foresee that Vanke’s profitability will continue to recover, with operating margins rising to 18.3% in 2027 from 15.1% in 2022. Despite the recent weakness in sales, we expect Vanke’s focus on acquiring landbank in wealthy cities and well-delivered products will help revive its sales growth in 2024.