Logan:The king of margin

1H17 resultswerefull of positive surprises.Core profit jumped 195%YoY to RMB2,548mnas booked property sales rose 85%YoY to RMB12.3bn. Booked GFA increased 32%YoY to 1.09mn sqm while booked ASP jumped 41%YoY to RMB10.6k/sqm. The results werea big positive surprise as Logan had only disclosed a core profit growth of ~100% in its profit alertannouncement. Margin also surprised on the upside, as gross margin increased by 9.1ppt YoY to 39.5%while net margin jumped 7.0ppt YoY to 20.6%on rising ASP. Logan City in Huizhouhad a gross margin of 60%,which boostedthe overall margin. Logan City, with no less than RMB30bnof saleable resources remaining, would guaranteea decent margin for the next three years. Net gearing declined 4.4ppt HoH to 67.0% as at June2017, as land acquisitionthroughpublictenderingamounted to only RMB12.4bn (or ~64% of 1H17 presales). Logan also declaredan interim dividend of HK19cents and a special dividend of HK3cents, representing 40% of its core profitor ~an interim yieldof ~3%.

Big Bay Areafocused. In 1H17, Logan’s presales jumped 34%YoY to RMB19.3bn, driven by a 4%YoY increase in GFA and a 30%YoYhike in ASP. Logan revised upits presales target from RMB34.5bn to RMB37bn. For FY17, Logan estimates the total saleableresources to reach RMB73bn. The revised targettherefore assumes arather conservative sell-through rate of 51%. Based on Logan’s estimates, its total landbank will offer more than RMB388bn of saleable resources, among which ~80% will be locatedin the BigBay Area.In 1H17, Logan intensified its effortin M&A and urban redevelopment by acquiring 21 projects (4.76mn sqm) with estimatedsaleable resources of RMB60bnin 1H17. As of June2017, 14.8mn sqm of the Group’s landbank was acquiredfrom open auction(Average cost: RMB4,680/sqm) while 13.1mn sqmwas procured throughM&A.Logan is confidentinachieving a 30% presales growtheach year andby 2020, its presale would reach RMB80bn.

Maintain BUY withrevisedTP of HK$8.30. We raiseour 2017E-18Ecore profit forecastsby 29-34% on better-than-expected 1H17 results and gross margin. Factoring in the latest land acquisitions, we revise up the NAV estimate to HK$16.60/ share (from HK$12.56/share) and TP to HK$8.30 (from HK$5.00), based on a reduced NAV discount of 50% (from 60%).Logan differentiates itself fromits peers with its superior margin and highpresales growth-unsurprisingly, we maintain BUYfor this Big Bay Area player. Risk factors: 1) Rising land cost in tier-1 cities; 2) Execution risks associatedwith urban redevelopment projects