Main points of investment
Maintain a "buy" rating with a target price of HK $13.30: the company focuses on the transformation of urban renewal, replenishes high-quality and low-cost land reserves, and is expected to maintain a gross profit margin above the industry average. At the same time, the company is expected to maintain a healthy debt level by actively optimizing financing costs and debt structure and strengthening payback and cash flow management.
We estimate that the company's core net profit in 2022 is 561.646 billion yuan, an increase of 13.0% and 15.2% over the same period last year. Maintain the "buy" rating, based on a downward valuation of the property sector as a whole, lowering the target price from HK $18.00 to HK $13.30, corresponding to 4x and 3.5x PE in 2021 and 2022.
The company's 2021H1 performance was in line with expectations: 2021H1, the company's operating income was 13.64 billion yuan (the same below), down 8.6% from the same period last year, mainly due to the impact of public health events in May and June in the first half, the delivery progress slowed down, and the centralized delivery period was in the second half of the year; the company's core homing net profit was 1.64 billion yuan, up 5.4% from the same period last year. The gross profit margin was 33.3%, up 6.4 percentage points from the same period last year, mainly due to the recognition of high gross margin urban renewal business income; the core return net profit rate was 12.0%, up 1.6 percentage points from the same period last year.
The company's interim results are in line with expectations.
Urban renewal and transformation accounted for 30% of the new land storage: 2021H1, the company added a total of 153 million square meters of land storage, of which urban renewal and conversion contributed 510,000 square meters, accounting for 32.9% of the new land storage, which replenished high-quality and low-cost soil storage for the company and effectively controlled the cost of land. As of 2021H1, the company's land reserve is 21.66 million square meters, which is enough to support the development in the next 3 years. The company also has 160 urban renewal projects, with a potential total land storage of about 5340 million square meters, all of which are located in the Great Bay area. With the continuous transformation of urban renewal business, the company is expected to maintain a higher gross profit margin than the industry average.
Steady growth in contract sales: 2021H1, the company's contract sales amount was 45.4 billion yuan, an increase of 39% over the same period last year, and 41% of the annual sales target; the average contract sales price was 1.93 million yuan per square meter, an increase of 39% over the same period last year, mainly because 93% of the company's sales came from economically developed cities in the Greater Bay area.
Debt structure has been optimized and financing costs have been further reduced: as of 2021H1, the company's asset-liability ratio excluding advance payments was 76.6%, down 2 percentage points from the end of 2020, and the company is expected to reduce the three red lines to green in 2022; the average financing cost is 7.0%, down 0.3% from the end of 2020, mainly due to the company's active debt management and optimization of financing structure.
Risk tips: slower macroeconomic growth; tighter industry regulation and control policies; tighter liquidity; lower-than-expected corporate sales; devaluation of RMB; and lower-than-expected progress of urban renewal projects