Steady profit growth in 2021; reiterate "Buy" and raise the target price to HK $3.1 We held a post-results conference call for BBG (BBE) on August 25 to invite management to share their views on the business outlook for 2021. 1) Management expects the real estate sector to achieve strong revenue and solid gross profit margins in 2021. 2) We expect cement prices in Jinyu's core market to rise further in the coming peak season and are optimistic about the overall demand prospect for 2H21. 3) given the downward pressure on profit margins on the property sector in the context of policy tightening, Jinyu is seeking to minimise the impact by speeding up the pace of project launches. In view of the company's tighter cost controls, we raised our 2021 net profit forecast by 10 per cent to 4.16 billion yuan, but lowered our 2022 net profit forecast by 3.8 per cent to 3.87 billion yuan to reflect lower profit margins in the property sector. The 23-year net profit is forecast to be 4.29 billion yuan. We maintain our "buy" rating and raise our target price to HK $3.10 (previous value: HK $2.80), corresponding to 0.4 times PB, which is in line with the average since 2016. It is predicted that the annual EPS of 21-22-23 will be 0.39 pound 0.36 pound 0.40 yuan.
In the past 21 years, the real estate revenue and profit margin are sound, and the long-term risk still exists.
We expect BBE 2021 real estate sector profit growth, income and profitability more robust. Management guidelines expect full-year carry-over income of 33.8 billion yuan (up 8 per cent year-on-year), carry-over area of 1.7 million square meters (up 12 per cent), contract amount of 38.6 billion yuan (down 26 per cent due to last year's high base), and gross profit margin of about 13 per cent. However, due to the tightening of policy regulation, we are cautious about the long-term outlook of the real estate business. The rise in construction, installation and labour costs caused by a superimposed epidemic of policy interventions, such as restrictions on pre-sale prices, has put pressure on property developers' gross margins. In the face of the above severe situation, the company takes positive measures, including optimizing product planning and speeding up sales turnover, in order to alleviate the adverse effects.
Industry coordination to provide key support for cement price repair, prices are expected to further rise in the core regional market 1H21 performance differentiation, northeast, northern Hebei cement prices stable, Shaanxi, southern Hebei cement prices fell sharply. We attribute the outstanding performance of some regional markets to the orderly implementation of off-peak production and efficient industry coordination. In view of the decline of the impact of the epidemic since 2H21 and the approaching peak season of traditional demand, we are optimistic about the outlook for demand. Sales so far in July and August this year are the same as in the same period in 2019, but due to a high base, the year-on-year growth rate is negative. At the same time, we expect cement prices in Jinyu's core market to rise further in the coming peak season, which is expected to hedge against the adverse effects of rising costs and support full-year earnings expectations.
Risk tips: 1) the deterioration of the real estate market is greater than we expected; and 2) the company pursues market share expansion through irrational pricing strategies.