The results of the three quarterly reports in 2021 are lower than we expected.

Shimao Co., Ltd. announced 1-3Q21 results: income 15.1 billion yuan, up 25% year-on-year, and home net profit 1.2 billion yuan, up 10% year-on-year, lower than we had expected, mainly because ① 3Q21's after-tax gross margin fell to 28% (33% in the first half of the year), and minority shareholders' profit and loss accounted for 78% of after-tax profit (48% in the first half).

Cash flow came under pressure in the third quarter, and the financial side remained sound. The company achieved a net cash outflow of 1.5 billion yuan from operating activities in the third quarter, and the margin of cash on hand at the end of the period dropped to 16.7 billion yuan (17.4 billion yuan at the end of the first half of the year), which is equivalent to 1.9 times of the interest-bearing liabilities due within one year (2.1 times at the end of the first half). At the end of the third quarter, the company's net debt ratio rose to 25% (19% at the end of the first half of the year), and the asset-liability ratio excluding advance receipts remained stable compared with the end of the first half of the year.

Trend of development

Sales are expected to grow steadily throughout the year, and the land holding end continues to be prudent. The company's sales in the first three quarters increased by 50% year-on-year to 24.1 billion yuan, and we expect the company's annual sales to increase to about 30 billion yuan, corresponding to a year-on-year growth rate of about 10% (implying a 47% year-on-year decline in fourth-quarter sales to 5.9 billion yuan). The company only acquired three plots in the first half of this year, corresponding to a total land price of 4.6 billion yuan, with a land acquisition intensity of 19% in the first three quarters. Looking forward, we expect the investment side of the company to exercise restraint in the short term.

Full-year earnings are expected to achieve steady growth. We expect the company's real estate sales revenue to increase by 10% in 2021 compared with the same period last year, which can contribute 1.26 billion yuan to the net profit of homing. With the decrease of vacancy rate in the rental market and the increase in rental level in the second half of the year, the company's leasing income is expected to achieve the target of 1.49 billion yuan (an increase of 30 percent over the same period last year), and the corresponding homing net profit is 370 million yuan. The company's 2021 return net profit is expected to increase 5% year-on-year to 1.63 billion yuan, corresponding to a core net profit of 3.6 billion yuan (up 11% year-on-year).

Profit forecast and valuation

Considering that the proportion of the company's settlement equity is lower than we had expected, we cut the company's 2021 and 2022 net profit by 8% and 14% to 16.3 and 1.77 billion yuan. The company's current share price corresponds to 7.6 times 2021 earnings and 7.1 times 2022 earnings. To maintain our neutral rating, we lowered our target price by 14% to 3.69 yuan (to reflect earnings adjustment), corresponding to 8.5 times 2021 price-to-earnings ratio and 7.8 times 2022 price-to-earnings ratio, which is 11% upside from the current share price.

Risk

Sales and leasing income fell short of expectations; the proportion of settlement equity declined more than expected.