China Vanke (A):In line with expectations,Promising 2H outlook on strong sales

What surprised us。

Vanke reported in line 1H10 results with net profit up 11% yoy toRmb2,812mn (or EPS of Rmb0.26), accounting for 42% of our previousfull-year estimate. Key takeaways: 1) Solid margins: Post LAT grossmargin came in at 29%, in line with our full-year estimate. Net margin,after write-back of Rmb232mn inventory write-down, was 17%, 5ppt higherthan our full-year estimate and was partly attributed to low income tax(effective tax rate of 24%). 2) Strong contract sales and high lock-in ratio.

We raised our ‘10E contracted sales estimate by 7% to Rmb59bn to reflectthe better-than-expected sales performance in the first 7 months of theyear (total Rmb45.2bn). Unbooked sales for 2H was Rmb65.7bn as of July10, suggesting 100% and 15% revenue lock-in ratio for 2010E and 2011Erespectively. 3) 30% yoy ASP increase. ASP for the first 7-months ofcontract sales reached Rmb11,417/sqm in ‘10 vs. Rmb8,811/sqm during thesame period in ‘09, implying solid 2H10 margin outlook.

What to do with the stock。

We raise Vanke A/B’ 2010E-2012E net profit estimates by 4%/1%/0.4% andNAV based 12-m TPs by 4.4% to Rmb9.00/HKD8.97 due to project updates.

Vanke A/B is trading at 38%/35% discounts to our end-2010E NAVestimates of Rmb12.86/HK$14.95, 12.5X/13.4X underlying 2010E P/E vs. Asharecoverage’s avg. 31% discount and 26.5X, respectively. Maintain Buyon Vanke A (on CL) and Vanke B (Aug 9: HK$9.74). Risks: worse-thanexpectedpresales; govt. over-tightening leading to macro hard landing.