Poly Real Estate Group In line with expectations: Strong EPS visibility; maintain CL-Buy

Poly A reported 1-3Q11 net profit up 51% yoy to Rmb3,467mn, 55% of our2011E estimate, in line with expectations. Highlights: 1) 1-3Q11 netmargin came in at 15.9%, up 2.7pp yoy, and we believe our 2011E forecastof 13.4% is achievable. Poly’s stronger-than-peers’ SG&A control (2.2% of1-3Q11 contract sales vs. peers’ 5%) helped support margins, in our view;2) We estimate 100%/9% of our 2012E/2013E revenue has been locked inas of September, on the back of its Rmb88bn unbooked contract sales (orRmb80bn cash proceeds), much better than peers’ 54%/3%; 3) 3Q11 netgearing stood at 125%, slightly better than 146% as of 1H11. We expectlittle funding risk for Poly in 2012, on the back of: a) better-than-peers’ debtstructure with short-term loans at 18% of total debt vs. peers’ 30%, andRmb22bn in cash well above Rmb12bn in short-term loans; and b) itsstate-owned background. In 3Q11, Poly recorded Rmb2bn net cash inflowfrom operations, on the back of its efforts to deleverage (Rmb3.1bn spentin 3Q acquiring land bank, down 24% qoq and 24% yoy).

What to do with the stock。

We reiterate Buy (on CL) and 12m NAV-based TP of Rmb13, given its: 1)Better than peers’ earnings visibility and stronger contract sales outlookwith mass market focus and fast-asset turnover model; 2) ability to accesslow-cost bank loans by leveraging its state-owned background. The stocktrades at 53% discount to end-2012E NAV, 8.2X 2012E P/E, and 1.5X 2012EP/B (2008 trough trailing P/B at 1.9X) vs. A-share peers’ avg of 52%, 8.4X,and 1.4X, respectively. Key risks: Worse-than-expected sales/cashmanagement and/or macro hard landing.