Investment suggestion
We downgraded Shimao Group from outperforming industry to neutral. We believe that the company's comprehensive leverage ratio is high in the industry, short-term debt maturity is more intensive, and investor concerns about its solvency may continue to depress share price performance. From the medium-term perspective, even if the industry returns to a normal business environment, we believe that under the policy constraints of "three lines and four gears", it may be difficult for the company to outperform its peers in the medium-term development vision.
The reasons are as follows:
High level of comprehensive leverage, short-term debt repayment pressure or continued to depress stock price performance. In recent years, the company has achieved rapid expansion mainly through leverage during the period from 2017 to 2019. As of mid-2021, we believe that after taking into account interest-bearing, non-interest-bearing and off-balance sheet liabilities, the company's "broad leverage ratio" is on the high side of the industry. Specifically, we use the multiple of the unsold value of equity and land reserves to measure the comprehensive leverage level, the final 1H21 of the company is 6.0times, which is higher than the average of the covered target. In addition, at the end of 1H21, the proportion of minority shareholders' equity in its balance sheet to net assets is 44%, and the proportion of the company's land reserve and consolidated statement is about 60-65%, all of which point to the high burden of off-balance-sheet borrowing in its debt disk. We believe that investor concerns about the company's short-term solvency may continue to depress share price performance.
The company's medium-term growth outlook is likely to be weaker than that of its peers. In November, the company achieved monthly sales of 18.1 billion yuan (Carey disclosed caliber), down 43% from the same period last year, and the cumulative sales amount so far from the beginning of the year was 259.9 billion yuan, down 1% from the same period last year. It is difficult for the company to achieve its annual sales target of 330 billion yuan. Considering that the company's current soil storage cover ratio is relatively low (1H21 end 2.6x, industry average 3.2x, figure 4), and the weak short-term sales growth rate and rising debt repayment pressure make it difficult for the company to replenish soil reserves in time, we believe that the company's medium-term growth potential will be affected to some extent. Looking forward, even if the industry returns to the normal business environment, according to our "three-image cycle" model, it will be in the "third line and fourth gear".
Under the policy constraints, the company will stabilize or gradually shrink the table in the next 2-3 years, making it difficult to outperform its high-quality counterparts in the compound growth rate of sales and profits.
The biggest difference between us and the market is that we believe that the company's sales and performance will be lower than market expectations, and the certainty of short-term debt repayment will be lower than market expectations.
Potential catalyst: sales and payback performance is lower than expected.
Profit forecast and valuation
Considering that the company's sales and delivery are still facing headwinds in the industry, we downgrade the core net profit forecast of 2021x2022 by 5% to RMB 147.7 billion, corresponding to a year-on-year growth rate of 6.5% and 12.5%. The company's current share price trades at 1.4x2021x2022p / e, and the target price is lowered by 71% to HK $6.58 to reflect earnings adjustment and changes in the company's risk appetite. The new target price corresponds to 1.5x2021max 2022p / e and 16% upside.
Risk
The financing environment is looser than expected; sales and profits grow faster than expected in 2021.