1-3Q21 performance is lower than we expected.
The company announced 1-3Q21 results: revenue rose 80 per cent year-on-year to 43.9 billion yuan, while profit fell 49 per cent year-on-year to 700 million yuan, which was lower than we expected, mainly because 3Q21 settlement profit margins and equity ratio fell short of expectations.
A number of factors put structural pressure on the results of the three quarters. The company's 3Q21 completion continued to grow, with the completed area growing by 76% year-on-year (1H21 up 85%), leading to a 66% year-on-year increase in 3Q21 revenue. Due to the concentrated settlement of the limit sales items during the period, the after-tax gross profit margin in the first three quarters fell by 10.2ppt to 17.2% compared with the same period last year (3Q21 fell by 13.2ppt to 17.8%). In the same period last year, the investment income from the disposal of subsidiaries was relatively high, and the investment income during the period decreased by 94% compared with the same period last year. At the same time, the proportion of settlement project equity is on the low side. In the first three quarters, the profit and loss of minority shareholders increased by 38 per cent year-on-year, accounting for 62 per cent of net profit (1H21 is 50 per cent). Together, these factors led to a 49 per cent year-on-year decline in the three-quarter results (- 34 per cent 1H21) marginal improvement in financial indicators. The company's end-of-period net debt ratio fell 32ppt to 147% from the beginning of the year, the withholding asset-liability ratio dropped by 0.4ppt to 74.5% from the beginning of the year, and the cash short-debt ratio (excluding pre-sale regulatory funds) was 1.4%, the same as at the beginning of the year, still in the "orange file", and the end-of-period interest-bearing liabilities shrank by 6% from the beginning of the year. We expect the company to maintain the cash-to-debt ratio by the end of the year, and the other two indicators are expected to continue the marginal improvement trend.
Trend of development
The sales target of 1100-120 billion yuan for the whole year is expected to be achieved smoothly. The company's sales volume in the first three quarters increased by 38% to 93 billion yuan compared with the same period last year, and the average sales price increased by 9% to 31356 yuan per flat in the first three quarters, of which 15% to 26.7 billion yuan in the third quarter compared with the same period last year, thanks to the relatively high energy level of the city layout of the company, sales volume and price still increased steadily in the colder market in the third quarter. The company plans to achieve 110 billion yuan in sales for the whole year and strive to reach 120 billion yuan. We expect this target to be successfully achieved, corresponding to a year-on-year growth rate of 2%, 12%, implying an average monthly sales of 60-9 billion yuan in the fourth quarter.
Lower leverage target to take land materials to continue to be cautious. In the third quarter, the company added 18 projects (including 8 new projects in 3Q21) and 1.5 million square meters of land storage, down nearly 50% from the same period last year, accounting for 50% of the sales area in the same period. By the end of the third quarter, the company had stored 2189 million square meters (to be developed + area under construction), a reduction of 9% from the beginning of the year, and unsold land reserves could still support sales demand in the next 2-3 years. We judge that under the support of relatively abundant domestic reserves, the company will continue to take a prudent attitude and give priority to ensuring that the leverage reduction target is achieved.
Profit forecast and valuation
Considering that the settlement profit margin in the fourth quarter is still under pressure, we cut our profit forecast of 20211x2022 by 20% to RMB283 billion. The current share price corresponds to a price-to-earnings ratio of 4.5 times 4.2 times 2021 and 2022 earnings. Maintain the neutral rating and lower the target price by 19% to 4.90 yuan to reflect changes in earnings forecasts, with the new target price corresponding to 4.5x2021pm 2022 price-to-earnings ratio and 0% upside.
Risk.
Financing tightened more than expected; sales in major cities declined more than expected