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

Zhongnan Construction announced 1-3Q21 results: operating income was 61.1 billion yuan, up 33% from the same period last year, and profit was 2.8 billion yuan, down 25% from the same period last year, which was lower than we expected, mainly because the 3Q21 settlement profit margin was lower than expected.

The results were lower than expected due to the high settlement volume in the third quarter but the sharp decline in profit margins. The company's real estate settlement income in the third quarter increased 61% to 17.6 billion yuan compared with the same period last year, leading to an increase of more than 30% in the first three quarters.

However, the gross profit margin of the settlement project was low, and the 3Q21 comprehensive after-tax gross margin fell 7.8ppt to 9.9% year-on-year, causing the after-tax gross margin to fall further to 12.3% in the first three quarters (1H21 is 13.7%). During the superposition period, the effective tax rate rose year-on-year to 1.8ppt (3Q21 upstream 7.3ppt), minority shareholders' profit and loss as a proportion of net profit also increased compared with the same period last year, and the decline in net profit at home widened to 25 per cent (of which 3Q21 fell 38 per cent year-on-year).

Continuous pressure reduction of interest-bearing liabilities, marginal optimization of financial indicators. The company's interest-bearing liabilities at the end of the period decreased by 20% to 63.7 billion yuan compared with the beginning of the year, and the net inflow of operating cash was 1.4 billion yuan, up 95% from the same period last The company's net debt ratio at the end of the period was 78%, down 20ppt from the beginning of the year, withholding the asset-liability ratio of 75.8%, decreasing 2.9ppt from the beginning of the year, and increasing the cash-to-short debt ratio by 0.04x to 1.08x (excluding pre-sale regulatory funds), keeping the "yellow file".

Development trend

Sales volume and prices increased slightly in the first three quarters, and the use of land materials became more cautious. In the first three quarters, the company realized sales of 153.7 billion yuan, an increase of 7% over the same period last year, a sales area of 1117 million square meters, an increase of 4% over the same period last year, and an average sales price of 13758 yuan per square meter, an increase of 3% over the same period last year. The sales amount and area decreased by 28% and 29% respectively in the third quarter due to the influence of the market. The company plans to continue to increase the size of the launch in the fourth quarter and improve the level of de-marketing. The company added 6 new plots in the third quarter, with an additional land storage area of 930,000 square meters, a decrease of 73% compared with the same period last year, with a land acquisition amount of 3.3 billion yuan, with a corresponding land intensity of only 7%, and a marginal decline in the willingness to take land. The company's new land storage area / amount in the first three quarters was 7.93 million square meters / 32 billion yuan respectively, down 23% and 36% compared with the same period last year, corresponding to 21% of the land intensity (34% in 2020). The company is currently under construction and unstarted land storage of 4579 million square meters, a slight increase of 2% over the beginning of the year, we judge that the follow-up company will be more prudent to take land, continue to improve the quality of statements, reduce the scale of debt, and achieve the "red line" standard.

Full-year settlement profit margin and performance growth are expected to be under pressure. We expect that the company's fourth-quarter completion carry-over will continue to drive solid revenue growth, but the settlement gross margin is still expected to be under downward pressure, leading to a year-on-year decline in fourth-quarter earnings. We expect the company's full-year after-tax gross profit margin to fall by 3-5ppt, the combined effective tax rate and the profit and loss share of minority shareholders to increase, and the decline in full-year profit is expected to be deeper than that in the third quarter.

Profit forecast and valuation

Taking into account the pressure on 4Q21 settlement profit margin, we cut our 2021 Unix profit forecast by 40% to 46. 6 billion yuan from 45% to 46. 6 billion yuan in 2022. The current share price corresponds to a price-to-earnings ratio of 3.2 times 2022. Maintain the outperform industry rating, and lower the target price by 40% to 4.18 yuan, mainly due to pressure on earnings growth and a decline in market risk appetite, with the new target price corresponding to 3.5 times 2021 soybean's 2022 price-to-earnings ratio and 9% upside.

Risk

The main layout of urban regulation and control policies are tighter than expected; settlement profit margins are lower than expected.