China Merchants Property:In line with expectations 2H contract sales improvement is key

What surprised us。

CMP reported 1H10 earnings at Rmb1.05bn or EPS at Rmb0.61, up 116%yoy, largely in line with previous profit warning on July 14 and achieving53% of our full year earnings estimates.

Key takeaways: 1). the earnings surge in 1H10 is mainly due to moreprojects available for booking during the period, including ShenzhenXicheng project, Shanghai Nanqiao project, etc. Gross margin slightlyimproved 1.8ppt vs. 1H09 to 28.5%, 1ppt lower than our ‘10E estimates at29.5%. Net margin dropped 1.9ppt yoy to 15.0% (2ppt lower than our ‘10Eestimates), mainly due to high tax expenses. 2). Looking forward, webelieve how to improve 2H10 contract sales is critical for CMP’s futureearnings performance. During 1H10, CMP achieved Rmb4.2bn contractsales (GFA 287k sqm), only at 35% of our ‘10E target at Rmb12bn vs. peers’54%, mainly due to its high exposure to tier-1 cities (like Shenzhen andShanghai) with slower property sales than lower tier cities; 3). Financialsremain healthy with 13% net gearing and Rmb10bn cash balance as ofend-June 10, mainly due to conservative land acquisitions in the past year.

What to do with the stock。

We retain our Neutral rating and NAV-based 12-month target price ofRmb15.20 and keep our 2010-2012E earnings estimates unchanged, as thebusiness operations are largely in line with our expectations. The stocktrades at a 39% discount to our end-2010E NAV, 16X 2010E P/E, and 1.8X2010E P/B vs. A-share peers’ average 34% discount, 16X and 2.1X. Keydownside risks: Further unexpected government policy tightening;slower-than-expected contract sales. Key upside risks: Better-than-expectedcontract sales.