China Resources (Holdings)

CR Land will ride out patch of weak sentiment, analysts say

PUBLISHED : Tuesday, 29 April, 2014, 2:59pm
UPDATED : Wednesday, 30 April, 2014, 4:22am

State-owned China Resources Land (CR Land) is still a top pick for investors in the mainland's property sector, analysts said, although a corruption investigation into a former chairman of its parent company has cast a shadow on its share performance for the time being.

The developer's former executive director, Wang Hongkun, was detained, along with Wu Ding, the chief executive of China Resources Capital, immediately after the mainland's anticorruption authorities announced on April 17 that they were investigating former China Resources group chairman Song Lin.

"It's uncertain how wide this investigation will eventually be," said Zhu Yiming, an analyst with China Real Estate Information Corp.

"It has so far only affected market sentiment but left the company fundamentals intact.

"If the investigation widens to affect the management team's business strategies, uncertainties will then increase."

CR Land shares closed 1.8 per cent higher yesterday at HK$15.84 but have fallen 5.49 per cent since trading resumed after the Easter holiday.

"Management personnel changes cause only short-term headwinds," said Edison Bian, the research head for China property at UOB Kay Hian.

"The company is still one of the most successful commercial property players [on the mainland], with much influence over mainland banks and in an advantage for land banking [because of its cheaper land cost]."

The company is expected to post 42 per cent compound annual growth in earnings for the four years to 2016 as it expands its development and investment properties, JP Morgan analysts said in a research note last month.

CR Land ended last year with a net gearing ratio of 39.2 per cent and funding cost of 3.76 per cent, both much lower than those of most of its rivals. That means a better chance of survival and expansion this year as a cooling market accelerates the consolidation of thousands of developers on the mainland.

A private developer in Zhejiang province has already gone under, and more are nearing the brink.

China Resources is one of 21 large state-owned enterprises the central government allows to invest in the property market, which it does through CR Land.

The property arm can thank its parent firm's market power for relatively cheap land and funds, while most of its rivals have to deal with soaring land prices and a tightening supply of credit.

However, the benefits that state ownership provides CR Land have failed to help it buck the industry trend of falling profitability.

The company's gross profit margin fell to 28.2 per cent last year from 37.6 per cent in 2012.

Foreseeing a liquidity squeeze, CR Land set a conservative target of 6 per cent growth in sales this year to 70 billion yuan (HK$88 billion) and locked up by the end of last year revenue of 52.5 billion yuan from property development in the past few years for recognition this year.

Analysts expect the parent company to inject assets, including its Shenzhen Dachong Village project, into CR Land this autumn to boost the listed unit's earnings.