Morningstar has released a report indicating a reduction in the fair value estimate for CHINA OVERSEAS (00688), which lacks an economic moat, by 9.5%. The estimate has been revised downward from HK$21 to HK$19, primarily due to a more conservative outlook on revenue. Despite this adjustment, the company remains the preferred choice within the China property sector for the research firm, with its current share price still trading at a 40% discount to the firm's valuation.

According to Morningstar, CHINA OVERSEAS experienced a 9% decline in revenue and a 26% drop in operating profit year-on-year for 2025. While lower selling prices for pre-sold properties negatively impacted profit margins, the company's land investment increased by 47% to RMB 119 billion, with a majority of new investments located in affluent regions of China.

The firm noted that the company's underwhelming performance mainly reflects previously weak profitability in property sales. However, it is anticipated that performance will improve as new projects, benefiting from enhanced quality, yield higher margins. Consequently, Morningstar maintains its expectation for a mid-cycle operating profit margin of 18.3%.

Although the five-year revenue compound annual growth rate forecast has been adjusted down from 5% to 4%, a moderate revenue rebound is still projected to begin from 2027, driven by a gradual recovery in housing demand within major mainland cities. Newly launched high-end projects are also expected to help alleviate inventory pressure before 2030.

CHINA OVERSEAS maintains a robust balance sheet, with a net gearing ratio of 34% in 2025, which is relatively low among Chinese developers. This financial strength effectively keeps the average financing cost below 3%, supporting debt repayment, land acquisition, and project development.