1H12 EPS was Rmb0.71, in line with expectation

In 1H12, operating revenue rose 24.6% YoY to Rmb10.08bn, whilenet profit dropped 16.9% YoY to Rmb1.22bn or Rmb0.71/sh, in line.

Solid growth in property project settlement; gross marginlargely flat. Major projects settled were in first-tier cities. GMafter tax was 32.3%, down 0.8ppt from 2011.

Stronger-than-expected sales lock revenue. The company iscurrently selling 36 projects in 15 cities, with the area and valueof signed sales contracts surging 181% and 136% YoY.

Advance payments as of end-1H12 reached Rmb21.59bn,27.9% higher than earlier this year, implying promisingearnings.

Results in line; profit margin was dragged by: 1) theLongyuan project in Shenshan, Shanghai suffered inventoryimpairment of Rmb210mn which was not deductable beforetax; 2) high minority interest loss arising from settlement of theLongyuan project in Beijing.

Trends to watch

The company spends about Rmb6bn for construction and installationevery year and faces limited pressure on land payments. We believethe company’s GM will hit a historical high of 34% assumingRmb10.5bn of revenue in 2H12, which will lead to full-year earningsof ~Rmb3.15bn after deducting a combined Rmb500mn ofadministration fees and sales expenses, lower than market consensusby ~5%.

Valuation and recommendation

We slightly lower 2012/13e EPS to Rmb1.83/Rmb2.07, since thecompany started to record impairment of inventory which will likelydrag down gross margin going forward. The B share stock is tradingat 6.6x/5.8x 2012/13e P/E, implying a 62% discount to 2013e NAV.

Maintain BUY rating in view of the company’s efforts to accelerateturnover and its decent project sales.