KWG FY15 disappoints with core profit of RMB2.6bn

Decline in GFA delivery was cited.

It has been noted that KWG was the first to disappoint the market with lower-than-expected FY15 earnings, ahead of the other Chinese developers.

According to a research note from Jefferies, the dividend cut, based on conservatism, cannot satisfy investors given the mild sales growth outlook.

Jefferies believes the near-term stock pressure is unwarranted, but a healthy liquidity position should mitigate downside risks.

Here's more from Jefferies:

FY15 results below expectation: KWG reported core profit of Rmb2.6bn, about 10% below consensus and our expectation, due to a 35% decline in GFA delivery (ex JCE) although recognized ASP (ex JCE) increased 19% on different product mix. An FX loss of Rmb770mn from Rmb fluctuations was reflected in the comprehensive income.

Taking into account the JCE contribution, gross margin / net margin fell slightly to 36.1%/15.7%, respectively. Net gearing climbed marginally to 69% from 67% a year ago. The company reduced final DPS by 12% to Rmb29 cents.

Moderate sales growth outlook: With Rmb20.2bn sales in 2015, given a 19% rise in completed inventory to Rmb6.5bn, KWG set a conservative target of Rmb22bn for 2016. This implies just 59% sell-through rate (2015:62%) on Rmb37bn resources. Of the total, c67% comprise new projects/phases, and KWG continues to target upgrade demand in Tier 1 cities (over 60%). The key margin driver will likely be office sales in Nanning and Shanghai.

Prudent strategy to be continued: First, KWG projected a net positive cash flow of Rmb5.1bn in 2016, and it aims to retain more investment properties, thereby preserving more cash to maintain stable operations. While land acquisitions will be opportunistic following six acquisitions totalling 1m sqm in 2015, its current land reserve (attributable) of 10.1m sqm is sufficient to sustain property development for four to five years.

Improving debt structure: Liquidity remains sound as KWG sits on Rmb12.6bn of cash at end-2015, up 16% yoy, compared to Rmb4bn of short-term debt. Domestic bond issuance brought down average debt cost from 8.3% in 2014 to 7.4% in 2015. We expect offshore debt ratio to further drop from 44% at end-15 within the next five years. A USD400mn senior note at 13.25% will reach maturity in March 2017.