1H21's overall performance was mixed; “buying” remained
1H21 results released by China Aoyuan (Aoyuan): 1H21's net profit from shareholders belonging to the parent company fell 14% year on year to RMB 2.1 billion, revenue increased 15% year on year, and gross margin fell 4.3 percentage points (mainly due to continued confirmation of low profit margin projects). At the same time, Aoyuan's balance sheet further improved, with a net debt ratio of 78% at the end of 1H21 (84% at the end of 2020), and the real interest rate falling to 7.0% (1H20:7.5%). We continue to be optimistic about Aoyuan's dominant position in some Greater Bay Area cities and its first-mover advantage in urban renewal business. We maintain Aoyuan's 2021-2023 EPS forecast at 2.50/3.04/3.49 yuan; the current stock price corresponds to 1.6 times the 2021 PE forecast, so we don't think the valuation is high. Maintaining the “buy” rating, the target price is HK$14.70 (based on the 2021 NAV forecast of HK$21.00 per share using a 30% discount).
It is expected that the pressure on profit margins will be alleviated through urban renewal business
The transformation of the Aoyuan 1H21 urban renewal project is progressing steadily, with an additional saleable value of RMB 14 billion (accounting for 76% of the additional saleable value of 1H21). Looking ahead to 2021-2024, we expect the company's urban renewal projects to contribute RMB 242 billion in total saleable value. The gross margin of these projects is about 35-40%, and the net profit margin is about 15-20%. Despite pressure on the short-term profit margins of Aoyuan's projects in low-tier cities, we believe its valuable reserve resources in the urban renewal sector (end of 1H21: RMB 754 billion, 99% in the Greater Bay Area) can cushion the company's profit margin pressure (2021-2023 gross margin is about 25-27%).
Prudent land acquisition to provide support for sustainable growth
The financial situation of 1H21 Aoyuan improved dramatically. The net debt ratio at the end of 1H21 reached 78% (84% at the end of 2020), and the real interest rate fell to 7.0% (1H20:7.5%). We believe the improvement is due to the company's prudent land reserves (1H21 total land cost is only 10% of contract sales). Given Aoyuan's continued prudent land replenishment strategy and valuable reserve resources (end of 1H21: RMB 1,348 billion), we expect Aoyuan's sales compound annual growth rate for the period 2021-2023 to be about 18%, and the net debt ratio for the period 2021-2023 to be about 50-81%.
Maintain “buy”, target price of HK$14.70
Given its balanced development, we continue to be optimistic about Aoyuan. Our target price of HK$14.70 is based on a 30% discount on the 2021 NAV forecast of HK$21.00 per share (unchanged). Maintain a “buy” rating.
Risk warning: 1) The transformation progress of the company's urban renewal project is slower than expected; 2) liquidity is tight; 3) business diversification is too aggressive.