Morningstar: Downward revision of CHINA OVERSEAS (00688) fair value forecast by 10%. Poor performance expected, but improvement anticipated in 2027.

Morningstar released a research report stating that the fair value forecast for CHINA OVERSEAS (00688), without a moat, has been cut by 9.5%, from HK$21 to HK$19, mainly due to a more conservative revenue outlook. However, the company remains the top pick for the firm in the Chinese real estate sector, with the current stock price still trading at a discount of 40% to the firm's valuation. Morningstar mentioned that CHINA OVERSEAS' revenue and operating profit in 2025 are expected to decline by 9% and 26% respectively. Despite the drag on profit margins caused by lower presale property prices, the company's land investment increased by 47% to RMB 119 billion, with most new investment plots located in affluent areas in China. The firm stated that the company's performance has been unsatisfactory, mainly due to weak profitability from previous property sales. However, with the expectation of higher profit margins from new projects due to improved quality, the firm anticipates a turnaround in performance. Therefore, the firm maintains its expectation of a 18.3% mid-term operating profit margin. Although the five-year compound annual growth rate forecast for revenue has been lowered from 5% to 4%, it is still expected that income will gradually rebound from 2027 with the gradual recovery of housing demand in major mainland cities. The introduction of high-end projects should also help ease inventory pressure before 2030. The company maintains a strong balance sheet, with a net debt ratio of 34% in 2025, which is relatively low among Chinese developers. This effectively keeps the average cost of financing below 3%, supporting debt repayment, land acquisition, and project development.