Reiterate Buy; January contract sales hitting record high

Country Garden (CG) just announced its January contract sales, which went up33% MoM, or about 600% YoY, and reached a new record high, at Rmb7.34bn.The January sales also exceeded the aggregate sales in the first quarter of lastyear (Rmb6.1bn). Looking ahead, although February will be slower due toChinese New Year (CNY), CG still possesses abundant saleable resources in1Q13of 9mn sqm in total, equivalent to over Rmb57bn in dollar value. As such,we believe that CG is well-positioned for a strong rebound for its sales in March,after the CNY holidays. We reiterate our Buy rating with a PO of HK$5.0.

Contract sales ASP at Rmb7.3k/sqm in January vs. Rmb6.2k/sqm for FY12

It is worth noting that the contract sales ASP in January was also good, atRmb7.3k/sqm, thanks to the contribution of two higher-ASP projects, Hill LakeBay in Nansha of Guangzhou (Rmb10-12k/sqm) and Grand Garden in Tangxia ofDongguan (Rmb7-8k/sqm). They contributed Rmb1.6bn of contract sales inaggregate. Given that these two projects’ land cost was only in the range ofRmb2-3k/sqm, we estimate that gross margin for them should be in the range of30-40%, even taking the higher land cost into account. In addition, if we justexclude these two high-ASP projects, CG’s January ASP would still be close toRmb7k/sqm, which again is decent, considering the FY12contract sales ASP wasonly Rmb6.2k/sqm.

Good margin outlook with Tier-3cities volume recovering

In our view, the market has been overly bearish on CG’s margin outlook, as wellas on sales in Tier-3cities. We have long argued that CG’s margin outlook ismuch better than perceived, since its contract sales ASP has been one of themost resilient in the space, down by a mere 1% YoY in FY12. The alreadydiscussed ASP trend in Jan-13has further solidified our view. Also, overall salesin lower-tier cities are improving. According to NBS, the decline in sales volume ofTier-3cities has substantially narrowed, from -12% as of 7M12to just -1% by end-12. CG stands to benefit from these trends, which we believe are not fully in theprice yet.

Valuation below historical average after latest correction

After the latest pullback in the share price, CG is currently trading at an 8.2x FY13P/E, still below its 3-year historical average of 9x. As such, we believe that therecould be some more uplift to CG’s valuation if the contract sales performanceremains good for the full year.

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