CRL（1109，HK）Proportion of sales in the first tier cities declined obviously

Summary

In 1H2010 CRL achieved a good performance, net profit rose by 168% to HKD 3.46billion, revenue increased by 266% to 12.4billion. However, sales were under the expectation, as of 22, August, sales just only were RMB 10.2billion, accounting for 38% of full-year sales target of 27billion.

We think that sharp dropping sales in the first tier cities and strategic transformation are the reason for bad sales in 1H2010, probably the full-year sales target will be lowered to 22billion. We give CRL “Hold” rating, 12m TP at HKD16.2, 5.6% higher than current close.

Summary of interim report

In 1H2010 turnover of CRL reached HKD 12.4billion, increasing 267% YoY, booked GFA were 0.814million sq.m., increasing 234% than that in 2009, net profit were 3.462billion, rising by 169%, EPS at HKD 0.69 while EPS in 1H2009 were 0.27. Gross margin was 38.9% while that in 1H2009 was 35.8%.

SharesProportion of sales in the first tier cities declined obviously

As of 22, August, sales of CRL were 10.16billion, contracted GFA were 1.05million sq.m., mainly located at the second and third tier cites, but proportion of the first tier cities declined obviously. The most important cities for sales included Chengdu, Ningbo, Hefei and ect, proportion of Beijing and Shanghai was 3.6% respectively, Shenzhen just only was 0.6%.

Currently CRL has less completing rate of full-year sales, only 38% of 27bilion. We think We think that sharp dropping sales in the first tier cities and strategic transformation are the reason for bad sales in 1H2010, probably the full-year sales target will be lowered to 22billion. In 3Q the company has increased supply and accelerated sales. We think that it's very possible to hit the new sales target of 22billion.

Up to now the sales sold and to be booked total RMB 29.2billion, which includes contracted sales of 10.2billion in 1H2010 and the sales sold and not be booked of 19.1billion in 2009. We expect that the amount that sold and to be booked at the end of 2010 will be RMB 43billion, 21.4 of which will be booked in 2010.

Development of commercial properties will be accelerated

Despite that residential development is core business of CRL, the company will gradually accelerate the development of commercial properties, and more resource will be put into the business of commercial properties. The interim report showed that revenue of investment properties and property management was 655million, up 24% YoY, accounting for less 10% of total. According to future planning, proportion of commercial properties in total revenue will be upgraded to 40%.

Currently land bank of CRL was 25million sq.m., and its parent company has land reserve of 2-3miilion sq.m. to be put into the listed company. We the rest land bank to be input will have limited impact on the NAV of CRL, so the model is not the main competitive edge of the listed company longer.

Risk

The new round controlling policies will be launched in 4Q.

Sales keep weak.

Valuation

We expect that revenue and net profit of CRL in 2010 was HKD 24.4bilion and 6.2bilion, EPS was HKD 1.24.

Considering the valuation of peers and operating character of CRL, we give CRL “Hold” rating, 12mTP at HKD16.2, 5.6% higher than current price.

Financials

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