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Evergrande's Growth Quality is Recognized by the Investors and its Market Value Exceeds RMB 290 Billion

 Date:2018.04.10   Publisher:Netease

As the time for the interim report comes, it can be said that Evergrande's positive earnings forecast has greatly excited the market in advance. According to the announcement of Evergrande on the 25th day, in the first half of 2017, its profit increased by about three times over the previous year; meanwhile, the profit that should be distributed to the shareholders of the Company increased significantly over the previous year.

As a result of such good news, on the 26th day, the stock price of Evergrande closed at HK $20.90, an increase of 18.08%; on the 27th day, the stock price of Evergrande opened at HK $22.3, an increase of 6.7%, which refreshed the record of the stock price of Evergrande.

The analysts point out that this year the performance of some real estate enterprises is sluggish after rapid growth, while the sales and profit of Evergrande in the first half of 2017 increase significantly, so the strength of Evergrande can be clearly seen. If it is calculated by an increase of 3 times, the profit of Evergrande in the first half of 2017 will reach RMB 21.4 billion. As the peak of settlement in the second half of 2017 comes, the profit of Evergrande in the whole year 2017 is expected to reach RMB 50 billion.

High Growth has Become the Focus of Investment

In recent years, the property market has been in the in-depth adjustment period. However, Evergrande has been able to keep the surge of its performance in successive years. In 2015, Evergrande's sales amount was RMB 201.3 billion, a year-on-year increase of 53%; in 2016, its sales amount was RMB 373.4 billion, a year-on-year increase of 85%; in the first half of 2017, its sales amount was RMB 244.1 billion, a year-on-year increase of 72%, and in the whole year 2017, its sales amount may exceed RMB 500 billion.

It is clear that the high growth in successive years is an important driver for the surge of the profit. Based on such high growth expectation, it is not difficult to understand that the investors continuously sought after Evergrande in recent days, while the stock price of Evergrande kept refreshing the record.

Many of the investors which sought after Evergrande were famous companies. The data shows that, in the first half of this year, some central enterprises, state-owned enterprises and large financial institutions, including CITIC, Zhongrong, DHC, Shum Yip Group, SDHS and Shenzhen Grandland, successively bought the shares of  Evergrande and became the strategic investors of Evergrande, involving a capital of RMB 70 billion.

With the introduction of RMB 70 billion in the strategic investment, the surge of three times in the profit and the redemption of total perpetual capital securities which was previously completed, under the superposition of various factors, Evergrande achieved the reduction of the debt ratio while growing rapidly. Morgan Stanley, Bank of America Merrill Lynch, Nomura Securities and other major international banks have predicted that Evergrande's debt ratio is expected to decrease by about 50%.

Major Banks are Optimistic about Evergrande due to its High Potentials

The net profit of Evergrande significantly increased by three times. It is obvious that such a high growth has gone far beyond the previous expectations of the major institutions. After the announcement of the positive profit alert, BOC International, Bank of America Merrill Lynch, CIMB, Morgan Stanley, Haitong Securities and other major international banks have successfully released research reports and they are optimistic about Evergrande's future market.

BOC International reports that the market seriously underestimated the revenue level and gross profit rate of Evergrande in 2017, and did not fully expected the extent of  releasing the profit by the redemption of total perpetual capital securities. Due to the surge of  the net profit of Evergrande, BOC International has upgraded the rating of the stock of Evergrande from "Buy" to "Strong Buy".

Bank of America Merrill Lynch believes that Evergrande's sales in the whole year 2017 will exceed RMB 500 billion, which will ensure that Evergrande can have a better profitability in the future. Therefore, Merrill Lynch gives the stock of Evergrande a rating of "Buy". CIMB believes that Evergrande's profit growth is strong and its net debt ratio will decline sharply; by the end of 2017,  Evergrande has the potential of continuing to be the No. 1 company in terms of the sales among the companies in China's real estate industry; and it will maintain a high growth in the next few years and eventually become the largest developer in China. Therefore, CIMB gives the stock of Evergrande a rating of "Buy".

Morgan Stanley believes that, in the first half of 2017,  the performance of Evergrande has gone far beyond the expectation of the market; meanwhile, because the total perpetual capital securities have been fully redeemed, the core net profit of Evergrande  is expected to be further released  in the second half of 2017. It is highly possible that Evergrande will lead the industry's upward trend in the next 15 days.

Logic Behind the High Profit

As mentioned above, the major factor for the surge of the profit of Evergrande is its high growth in successive years. Then, what is the logic behind  its high growth in successive years?

Some industry observers believe that the contribution of the huge market advantage formed by Evergrande with high cost-effective products can not be left unrecognized; the standardized operation model of  "unified planning, unified bidding, unified procurement and unified distribution" helps Evergrande to strictly control the costs and ensure the equality of excellence and consistency of the quality of its products. Meanwhile, the close group management model ensures the high cost-effective characteristic when Evergrande replicates its products throughout China. Thus, Evergrande develops a national market advantage.

The high cost-effectiveness of the product is best reflected in the quality of the product. In order to control the quality of the product, Evergrande requires that the construction companies must be China's top 10 companies, all the materials used must be sourced from well-known brands at home and abroad, and the landscape environment must be designed according to the standard of the mansion. In addition, Evergrande constantly improves the value added of the product by providing the facilities first,  upgrading the property services, and improving the after-sales services, etc.

Furthermore, the completion of the transformation of "real estate + service industry" also lays a foundation for the sustained high growth of Evergrande in the future. At present, Evergrande's idea on multi-industry development is clear, namely, focusing on finance, health and cultural tourism industries, and no longer entering new fields. This means that Evergrande's industry concentration is further improved and its resources are further intensively used.

Moreover,  as important service industries, finance, health and cultural tourism have a broad market space. It is not necessary to discuss the market size of finance. According to  the data of the third-party, by 2020, the market size of the health industry will reach RMB 8 trillion; and the market size of the cultural tourism industry will reach RMB 7 trillion. This means that Evergrande's new industries are expected to be greatly improved from the beginning of this year.

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