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Chinese Estates Holdings Limited (HKG:127): Does The Earnings Decline Make It An Underperformer?

Collin Greene

When Chinese Estates Holdings Limited (HKG:127) released its most recent earnings update (31 December 2017), I compared it against two factor: its historical earnings track record, and the performance of its industry peers on average. Understanding how Chinese Estates Holdings performed requires a benchmark rather than trying to assess a standalone number at one point in time. Below is a quick commentary on how I see 127 has performed. View out our latest analysis for Chinese Estates Holdings

Was 127’s recent earnings decline indicative of a tough track record?

127’s trailing twelve-month earnings (from 31 December 2017) of HK$3.71b has declined by -41.69% compared to the previous year. Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of 8.21%, indicating the rate at which 127 is growing has slowed down. Why could this be happening? Well, let’s look at what’s going on with margins and if the rest of the industry is facing the same headwind.

Over the past couple of years, revenue growth has failed to keep up with earnings, which indicates that Chinese Estates Holdings’s bottom line has been propelled by unsustainable cost-reductions. Looking at growth from a sector-level, the HK real estate industry has been growing its average earnings by double-digit 46.68% in the previous year, and a more subdued 4.76% over the past half a decade. This shows that whatever tailwind the industry is enjoying, Chinese Estates Holdings has not been able to reap as much as its industry peers.

SEHK:127 Income Statement June 24th 18

In terms of returns from investment, Chinese Estates Holdings has not invested its equity funds well, leading to a 10.41% return on equity (ROE), below the sensible minimum of 20%. Furthermore, its return on assets (ROA) of 2.22% is below the HK Real Estate industry of 3.99%, indicating Chinese Estates Holdings’s are utilized less efficiently. However, its return on capital (ROC), which also accounts for Chinese Estates Holdings’s debt level, has increased over the past 3 years from 4.38% to 7.87%. This correlates with a decrease in debt holding, with debt-to-equity ratio declining from 51.04% to 50.17% over the past 5 years.

What does this mean?

While past data is useful, it doesn’t tell the whole story. Generally companies that face a prolonged period of decline in earnings are going through some sort of reinvestment phase with the aim of keeping up with the recent industry growth and disruption. I recommend you continue to research Chinese Estates Holdings to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 127’s future growth? Take a look at our free research report of analyst consensus for 127’s outlook.
  2. Financial Health: Is 127’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2017. This may not be consistent with full year annual report figures.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.