Earnings expected to grow 6% YoY

We expect Lujiazui’s 2019 attributable net profit to have grown 6% YoY to Rmb3.6bn or Rmb0.88/sh, in line with market expectations.

Trends to watch

We expect 2019 earnings to see single-digit growth and profit, margin to see marginal improvement. We expect 2019 revenue to grow 12% YoY to Rmb14.2bn （with about Rmb5.0bn from a high-margin land plot in Qiantan）， gross margin to rise 2ppt YoY to 46%, and attributable net profit to rise 6% YoY.

Expanding rental properties to drive steady rental income growth in 2019. We estimate the GFA of Class-A office buildings rose 11% YoY to 1.75mn sqm, and GFA of shopping malls climbed 3% YoY to 460,000sqm. We expect rental income to have grown about 10% YoY in 2019 （vs. 15% in 1-3Q19）。 Looking ahead, we think COVID-19 will weigh on revenue from shopping malls and hotels in the near term; as they account for about 20% of rental properties （GFA）， we estimate rental income will remain largely stable YoY in 2020.

Sales value to drop 54% in 2019 and stay at Rmb3.0bn in 2020. We estimate that 2019 sales value fell 54% YoY to Rmb3.0bn in 2019.Given the launch of the Chuanshan project in Shanghai in 2020, we expect sales value to remain at Rmb3.0bn in 2020. The firm acquired 630,000sqm of land in Shanghai in 2019 （vs. 50,000sqm in 2018） at a cost of Rmb12.1bn, about four times the value of sales in 2019.

Advantage in financing to stay; high payout ratio to continue. The firm acquired the Zhangjiang project in 2H19 for Rmb9.1bn, and we estimate end-2019 net gearing ratio stayed high （end-3Q19 at 140%）。We estimate average financing cost at 4.5% in 2019 （vs. 4.7% in 2018）， which is low for the sector. We think the firm will maintain a 50% payout ratio in 2019 and 2020 （vs. 50% in 2017-2018）， implying dividend yields at 7.0% and 7.5%.

Valuation and recommendation

We maintain 2019 EPS forecast unchanged, trim 2020 forecast 3% to Rmb0.90 （COVID-19 may weigh on rental income）， and introduce 2021 forecast at Rmb0.98. The B-shares are trading at 6.7x and 6.2x 2020e-2021eP/E. The A-shares are trading at 13.5x and 12.4x 2020e-2021eP/E. Maintain NEUTRAL for Lujiazui A-share and B-share with TP at Rmb13.01 （14.4x and 13.3x 2020-2021e P/E with 7% upside） and US$0.94 （7.0x and 6.5x 2020-2021e P/E with 5% upside）。 Risks: COVID-19 longer than expected; disappointing leasing rate and/or launch of Chuansha project.