COGO announced a positive profit alert. The Company revealed that net profit in 2019 is expected to increase more than 60% because of rise in revenue from properties sales and gross margin expansion. We raise our net profit forecast by 7.9% in 2020 and 8.3% in 2021. In addition, we adjust upward end-20 NAV forecast from HK$10.47 to HK$11.03. As a result, we raise TP from HK$5.23 to HK$7.72 based on a smaller discount. Maintain BUY.
- Net profit would surge 60% in 2019. COGO announced a positive profit alert. The Company revealed that net profit in 2019 is expected to increase more than 60% because of rise in revenue from properties sales and gross margin expansion. In 2018, COGO recorded net profit of HK$2.49bn. In other words, net profit is expected to be more than HK$3.98bn in 2019, which is 8% higher than our forecast (HK$3.68bn) and 10% higher than street’s forecast (HK$3.63bn).
- Better than expected contracted sales. In 2019, contracted sales amount and area surged by 25% to HK$63.2bn and 26% to 5.04mn sq m, respectively. It is 9% higher than the Company’s planning of HK$58bn. We believe this will drive the future earnings growth. We raise earnings forecast by 7.9% to HK$4.66bn in 2020 and 8.3% to HK$5.28bn in 2021 to reflect the better-than-expected contracted sales.
- Projects in 25 mainland cities. In 2019, COGO acquired 31 plots of land with total GFA of 6.19mn sqm. Total land cost was RMB27.9bn. Accommodation value was RMB4,499/sq m, representing 40% of 2019 contracted ASP. The Company replenished four plots of land with total GFA of 0.47mn sq m in Hohhot in 2019. It seems that inventory problem in Hohhot was resolved. Furthermore, it entered new markets in Quanzhou, Weinan and Qingyuan so that the Company had invested projects in 25 mainland cities.
- Raise TP to HK$7.72. We estimate net gearing ratio to be 24.2% as at end-19 and 18.9% as at end-20. COGO has the healthy balance sheet for business expansion. In addition, we raise our end-20 NAV forecast from HK$10.47 to HK$11.03 to reflect the newly acquired lands. Furthermore, better-than-expected contracted sales would help re-rating. As a result, we use 30% discount to NAV, instead of previous 50%, to determine TP. Then, we raise TP from HK$5.23 to HK$7.72. Upside potential is 32.0% Reiterate BUY.
