1H21 performance is in line with market expectations
China Aoyuan announced 1H21 results. Revenue increased 15% year on year to 32.5 billion yuan, and core net profit fell 12% year on year to 2.16 billion yuan, in line with market expectations.
The balance sheet repair is beginning to bear fruit. At the end of 2020, the company was in a “yellow zone” due to the withholding debt ratio (78.4%). In the first half of the year, the company actively implemented the strategy of “stabilizing scale and reducing leverage”, restrained land use (land payments accounted for 17% of repayments), strictly controlled repayment (repayment rate remained at 87%), and the size of interest-bearing debt fell slightly by 3%. However, due to the company's mid-term dividend payment for the full year of last year, there was a slight contraction in returning equity, compounded by a slight decline in minority shareholders' equity. Therefore, the medium-term withholding debt ratio stabilized at 78.5% and did not decrease. However, the net debt ratio fell 2 percentage points to 80.7%, and the short-term cash debt ratio remained 1.3 times. In addition, Aoyuan's mid-term average financing cost declined by 0.2 percentage points to 7% from 2020.
Looking ahead, the company plans that the amount of land acquired this year and next two years will not exceed 20% of sales, the amount of interest-bearing debt will fall below 100 billion yuan this year (corresponding decrease of about 15%), the decline next year will not be less than 5%, and the compound growth rate of returning home equity will not be less than 15% through active settlement, thus entering the “green zone” by the end of next year.
The scale of land storage has been reduced, and the old reform continues to advance. In the first half of the year, the company restrained land acquisition and only replenished 17.8 billion yuan, of which 76% contributed to the transformation of old village projects in Zhuhai and Guangzhou. As a result, the value of land storage in the medium term was reduced by 4% to 593.9 billion yuan compared to the end of last year. In the first half of the year, Aoyuan's old reform market continued to expand. By the middle of the year, the potential convertible value of the old reform reached 754.3 billion yuan, and the company expects to reach 400, 52, 68, and 82 billion yuan respectively in 2021-24. The old reform has become an important channel for increasing its savings. Considering that renovation projects generally have a high gross margin of 35-40%, we believe the quality of the company's land storage is expected to be generally stable.
Development trends
The annual sales target is expected to be achieved smoothly. In the first half of the year, Aoyuan achieved 45% of the annual sales target of 150 billion yuan (13% year-on-year increase). Considering that saleable resources were plentiful in the second half of the year, reaching 155 billion yuan (including 90 billion yuan in new sales), we believe that the annual target is expected to be achieved smoothly. Sales quality remained stable in the first half of the year. We estimate gross sales margin of about 26% and equity ratio of about 73%.
Profit forecasting and valuation
Based on the adjustment of the pace of delivery, the profit forecast for 2021-22 was lowered by 8% and 10% to 5.3 billion yuan and 6 billion yuan (corresponding increase of 10% and 13%); based on profit forecast adjustments and superposition, there was uncertainty about profit growth in the financial process, and the target price was lowered by 19% to 6.07 HKD (2.6 times the 2021 price-earnings ratio, 30% upward space) to maintain a neutral rating. The company is currently trading at 2.0 times and 1.8 times the 2021-22 price-earnings ratio, 18.0%, and 20.2% dividend yields.
risks
Sales and delivery performance in 2021 exceeded our expectations.