1-3Q19 results in line with our forecast

Lujiazui Finance & Trade Zone Development reported 1–3Q19 results:

revenue rose 22% YoY to Rmb10.5bn and attributable net profitincreased 16% YoY to Rmb2.5bn （Rmb0.62/sh）， in line with estimates.

Gross margin rises; expense ratio falls. In 1–3Q19, after-tax grossmargin rose 6ppt YoY to 48%, and overall expense ratio fell 3ppt to12%. Attributable net profit gained 11% YoY in 1H19 （from a highinvestment income base in 1H18）， and further increased 44% YoY in3Q19, driving attributable net profit to grow 16% YoY in 1–3Q19.

Operating cash flow （OCF） remains negative; net gearing ratio stayshigh. OCF outflows totaled Rmb9bn in 3Q19 （vs. outflows ofRmb562mn in 1Q19 and Rmb1.1bn in 2Q19, and an inflow ofRmb2.2bn in 3Q18） and Rmb10.6bn in 1–3Q19 （vs. an inflow ofRmb3.2bn in 1–3Q18）。 At end-3Q19, cash in hand fell 2% toRmb3.6bn vs. early 2019, and net gearing ratio reached 140% （vs.

131% at end-2018 and 151% at end-1H19）。 In 3Q19, the firm issuedcommercial paper including Rmb1bn at 3.2% and Rmb800mn at2.98% （both 270 days）， with low financing cost.

Trends to watch

Full-year sales value to reach Rmb1.2–1.5bn. GFA-sold of residentialproperties fell 81% YoY to 15,800 sqm and sales value declined 75%YoY to Rmb827mn in 1–3Q19, with ASP up 36% YoY toRmb52,451/sqm. Sales value and GFA-sold fell 92% and 94% YoY in3Q19. We expect full-year sales to decline significantly to Rmb1.2–1.5bn from Rmb6.5bn in 2018.

Rental property business steadily growing. Rental income grew 15%YoY to Rmb3bn in 1–3Q19, and it grew 23% YoY in 3Q19 as theaverage rent of first-tier office buildings rose over 10% vs. 1H19.

Financials and valuation

We leave our 2019 and 2020 EPS forecast unchanged. The B-sharesare trading at 8.7x 2019 and 8.3x 2020 P/E. The A-shares are tradingat 15.5x 2019 and 14.7x 2020 P/E. We maintain a NEUTRAL rating forthe B-shares and A-shares; we keep target prices for the B-shares ofUS$1.21 （9.5x 2019 P/E and 9.0x 2020 P/E, offering 10.0% upsidefrom the current price） and for the A-shares of Rmb14.88 （16.8x2019 P/E and 16.0x 2020 P/E, offering 8.9% upside）。 Risks:

Disappointing project launches; tighter regulations on propertymarkets in major cities.