1H21's overall performance was mixed, and the rating was raised to “hold”
Yuzhou Group (Yuzhou) released 1H21 financial report: core net profit of RMB 739 million, total revenue of RMB 12 billion, gross margin of 20% (2020:20%). Yuzhou declared an interim dividend of 5.3 HK cents per share (1H20:12.0 HK cents). Furthermore, Yuzhou's balance sheet further improved (net debt ratio at the end of 1H21 was 90%; end of 2020:97%). Although the company's performance in 2020 fell short of expectations, the 1H21 delivery area increased 703% year-on-year. We believe this reflects the improvement in Yuzhou's execution. We expect the company's EPS for 21-23 to be RMB 0.45/0.45/0.49 yuan respectively; the current stock price corresponds to 3.0 times the predicted PE for 2021. We think the valuation is reasonable; we have raised the rating from “sell” to “hold”.
Improved execution relieves the market's worries
We believe that the direct reason for Yuzhou's poor performance in 2020 was poor execution. However, the company 1H21 achieved a total delivery area of 905,000 square meters, a sharp increase of 703% over the previous year. We believe this reflects an improvement in its execution and will ease investors' concerns about the company. At the same time, Yuzhou introduced a profit-oriented high-quality growth strategy to maintain steady scale growth on the basis of pursuing profit growth. Given the company's sufficient value of goods (end of 1H21: RMB 443 billion), we expect a compound annual growth rate of 11% in 2021-2023; gross margin will remain stable at around 20-21% during this period.
Benefiting from reduced investment in land acquisition, the financial situation is sound
Benefiting from deleveraging efforts, Yuzhou further improved its balance sheet at 1H21. The net debt ratio at the end of 1H21 was 90% (end 2020:97%), and total loan amount fell to RMB 62 billion at the end of 1H21 (end of 2020: RMB 66 billion). Meanwhile, Yuzhou reduced its land acquisition investment budget in 1H21. The total land acquisition was only 4, and the land equity price was RMB 2.2 billion (1H20: RMB 141 billion).
The company insists on implementing a careful financial plan, and in the future it will strictly control land acquisition costs to no more than 40% of sales in the same year. We expect Yuzhou's balance and liabilities to remain stable from 2021-2023, with a net debt ratio of about 87-93%.
Upgraded the rating to “hold”; keep the target price unchanged
We maintained our target price of HK$1.80, a 50% discount (unchanged) from our 2021 net asset value forecast of HK$3.50 per share. Given Yuzhou's reasonable valuation and significant improvement in execution, we upgraded our rating to “hold”.
Risk warning: 1) Downside risk: sales growth is weaker than expected; real estate project delivery is slower than expected; and interest costs increase; 2) Upside risk: sales growth rate is higher than our expectations; profit margin is higher than our expectations.