1H21 performance is in line with market expectations

Times China announced 1H21 results, constrained by the pace of housing development and delivery, with revenue falling 9% year-on-year to 13.6 billion yuan in the first half of the year. However, thanks to the urban renewal business generating 7-800 million yuan of after-tax profits (mainly from refunds collected and stored by the government after the conversion of the two old factories), core net profit increased 5.4% year-on-year to 1.64 billion yuan, in line with market expectations. The company did not announce an interim dividend, which is consistent with the dividend policy of previous years.

The implementation of urban renewal continues to reinforce land storage resources. By the end of the first half of the year, the company's potential value of urban renewal exceeded 1.6 trillion yuan, and Guangfo accounted for 76% by area, and Dongguan and Huizhou accounted for 20%, with an excellent layout. In the first half of the year, the company converted and included two land storage projects, with a corresponding value of 10.3 billion yuan, accounting for 40% of the value added. At present, the proportion of old transformation projects in the company's land storage has reached 30% (according to construction). The company expects the conversion of old land to contribute about 35 billion yuan in confirmed goods value this year, and there may be about 200 billion yuan of old village projects to be gradually implemented in the next two years, continuing to consolidate the resource inventory. By the end of 1H21, more than 90% of the company's land storage stock was located in the Greater Bay Area, with a land to goods ratio of about 25%, making it competitive.

There has been a steady improvement on the financial side. The company was still in the “yellow range” below the “three red lines” by the middle of the year, but various indicators were steady, medium and better than at the end of 2020: the withholding debt ratio fell 2 percentage points to 76.6%, the net debt ratio was generally stable at 71%, and the short-term cash debt ratio improved slightly to 2.3 times. This is mainly due to the company's strict focus on repayment efficiency since this year, and the cumulative repayment rate increased from 75% last year to 80%, which led to a 39% increase in equity sales repayments over the same period last year. On the other hand, land acquisition moderation (land payments account for 29% of sales repayment) and increased minority shareholders' equity also supported financial improvements. Furthermore, the share of the company's medium-term short-term debt fell to 21% compared to 30% at the end of 2020, and the average financing cost also improved 0.3 percentage points to 7% compared to the end of 2020. We expect further improvements by the end of 2020.

Development trends

It is expected that sales targets will be achieved smoothly throughout the year, and profits will grow by low single digits. The company achieved 41% of the annual sales target of 10 billion yuan in the first half of the year (10% increase over the previous year), and plans to launch 60 billion yuan of new products in the second half of the year, providing solid support for reaching the target. On the profit side, considering that the contribution of old reform projects to carry-over is limited this year, gross profit margin is still suppressed, and minority shareholders' profit and loss share is increasing or suppressing return profit performance, we expect a low single-digit increase in core net profit throughout the year.

Profit forecasting and valuation

Maintain profit forecasts and neutral ratings. Considering the possible interference of individual housing companies' credit risk on sector sentiment, the target price was lowered by 17% to HK$10.29 (3.4 times the price-earnings ratio in 2021, with 24% upside). The company is currently trading 2.7 times and 2.4 times the price-earnings ratio of 2021-22, with corresponding dividend yields of 10.9% and 12.5%.

risks

Demand for home purchases in the Greater Bay Area fell more than expected.