China Resources Land’s 2022 Results in Line

China Resources Land’s 01109 2022 performance was in line with our expectation and we keep our fair value estimate at HKD 43. Our earnings forecast is little changed. We expect generally favorable market reaction to CR Land’s affirmation for growth in sales and profit for 2023. CR Land’s management acknowledges the rising segregation in China’s real estate industry among financially stronger property developers that can afford to acquire quality land bank and projects versus others. We think this will lead to a better earnings growth outlook for CR Land and peer China Overseas Land & Investment, especially given both companies’ focus on Tier 1 and better located Tier 2 city projects. CR Land remains one of our preferred China real estate companies. At our fair value estimate, CR Land trades at 1.0 times price/book, in line with its historical range.

CR Land maintained its property development operating margin at 22% in 2022. Like others, the hotel segment was weakest, but this is rebounding with China’s reopening. For 2023, we expect 10% growth in property development revenue and a stronger growth of 18% in rental income in the absence of rent relief. CR Land management is targeting 20% rental income growth. We look for gross margin to improve to 27.5% in 2023 from 26.2% in 2022 and operating margin to rise to 23.0% from 22.3%. One disappointment was the higher effective tax rate of 45% in 2022 versus 41% in 2021, and we have raised our tax rate estimate to 45% going forward. Overall, we project 2023 and 2024 EPS growth at 11.8% and 14.6%, respectively.

CR Land management continues to want to spin off its investment properties into REITs to recycle its capital. We think this would be positive for shareholders as it enables valuation upside to be recognized.