1H21 performance is mixed; maintain "hold"
Zhengrong Real Estate announced mixed results of 1H21 on August 22. Reported net profit / core net profit 1H21 grew steadily by 33% compared with the same period last year, mainly due to a 10% year-on-year increase in revenue and an increase in revenue from non-recurring items (RMB 853 million from the sale of subsidiaries by 1H21; 1H20: RMB 12.73 million); and 2) 1H21 gross profit margin decreased slightly by 1.3% to 19%, mainly due to the continued carry-over of low-margin projects. At the same time, the company's net debt ratio improved to 60% at the end of 1H21, and the average financing cost further reduced to 6.35%. The company's interim results did not allay our concerns about the pressure on its profit margins, which we expect to remain low in 2021-2023 (around 6.3-6.5%). We continue to wait and see more performance improvements in profitability to adjust our ratings. We maintain the EPS forecast for 21-23 years, which is 0.66 and 0.75, respectively, and maintain the "hold".
Scale expansion is advancing steadily; profits are still weak.
Zhengrong Real Estate 1H21 achieved contract sales of 82.3 billion yuan (up 47 per cent year-on-year) and achieved 55 per cent of its full-year target. Given that the company maintains a reasonable land reserve size (end of 1H21: 29.3 million square meters) and prudent pace of land acquisition (the newly acquired area of 1H21 is 28% lower than the contracted sales area for the same period), we believe that the company will further control the pace of sales expansion. On the other hand, the rising cost of acquiring land (the average land price of new 1H21 area is 9161 yuan / square meter; 1H20: 7472 yuan / square meter) puts pressure on the company's profitability. We expect the company's gross margin to remain low (18.2-18.6%) in 2021-2023, waiting for more earnings growth to reverse our view of the company.
The balance sheet is the icing on the cake
We believe that Zhengrong Real Estate continues to consolidate its credit position, which can be confirmed by the following aspects: 1) the net debt ratio increased to 60% at the end of 1H21, down 11 percentage points from 71% at the end of 2020; 2) at the end of 1H21, the cash / short-term debt ratio remained at a favorable level of 2.19 times (end of 1H20: 2.20 times) 3) benefiting from the improvement in the balance sheet, the average financing cost at the end of 1H21 further fell to 6.35% (end of 1H20: 7.00%). We continue to be optimistic about the positive financial prospects of Zhengrong Real Estate.
Reiterate "hold" with a target price of HK $5.00
We reiterate our conservative view of Zhengrong property, mainly because we believe that it lacks a profit growth point. We maintain the EPS forecast for 21-23 years, which is 0.66 mark 0.75pm 83 yuan respectively. At the same time, we maintain the target price of HK $5.00 (unchanged), a 45% discount to our 2021 forecast of net asset value per share of HK $9.00 (unchanged).
Maintain the "hold" rating.
Upside risks: 1) improvement in gross profit margin; 2) profit release of the joint venture earlier than expected. Downside risks: 1) core profit margins continue to be under pressure; 2) contract sales are lower than we expected.
