1H21 performance highlights strong execution, maintaining "buy"
Sunac China (Fuchuang) announced 1H21 results: core net profit rose 1 per cent year-on-year to 13.2 billion yuan, mainly because revenue rose 24 per cent year-on-year, while gross profit margin fell slightly by 2 percentage points. At the same time, the financial situation of Sunac has further improved, with a net debt ratio of 87 per cent at the end of 1H21 (96 per cent at the end of 2020) and an asset-liability ratio (excluding pre-sales) of 76 per cent (79 per cent at the end of 2020). While we believe that the market has expected an improvement in the company's balance sheet at 1H21, we believe that its 1H21 performance is further proof of Sunac's strong executive ability. Sunac's current valuation corresponds to 2.3 times the 2021 forecast PE, which is attractive. We keep the company's EPS forecast for 2021-2023 7.18 pounds 7.93 pounds 8.66 yuan, respectively, and maintain "buy".
High-quality land reserve supports sales growth
Sunac 1H21 contract sales of 320.8 billion yuan (up 64% year-on-year), accounting for 46% of its 2021 sales target (700 billion yuan). Looking ahead to 2H21, the company plans to launch RMB 667.5 billion in marketable resources, which we expect will support Sunac to exceed its full-year sales target. At the same time, Sunac continues to replenish land reserves through diversified channels, and 38 per cent of 1H21's new equity sellable resources (about RMB 213.5 billion) are obtained through diversified channels (mainly mergers and acquisitions and tourism land acquisitions). Based on this, Sunac has a rich reserve of high-quality land (at the end of 1H21: the salable value of equity is about RMB 2 trillion), so we expect the company to maintain double-digit year-on-year growth (about 11-13%) from 2021 to 2023.
Sustained deleveraging and balanced growth
Sunac has steadily deleveraged at 1H21, with the company's net debt ratio falling to 87 per cent at the end of 1H21 (96 per cent at the end of 2020) and the asset-liability ratio (excluding presale) improving to 76 per cent at the end of 1H21 (79 per cent at the end of 2020). In the government's "three red lines" assessment of real estate developers, the company is still in the yellow file. In view of Sunac's established leading position in scale, we expect it to: 1) continue to focus on improving its balance sheet during 2021-2023 (for example, the company aims to maintain its equity land-to-sales ratio of less than 20% in 2021); 2) further nurture the cultural travel business, which will become a diversified source of profit in the long run.
Maintain "buy" with a target price of HK $48.50
We believe that financing or continue to be favored by the capital markets, mainly high-quality balanced growth. Our target price is HK $48.50, a 40% discount to our projected net asset value per share (HK $80.90) for 2021. Maintain "buy".
Risk tips: 1) sales growth during 2021-2023 is not as expected; 2) land cost structure is deteriorating; 3) debt ratio improvement is not as expected.