Revenue growth was strong in 2021, but profits were slightly lower than expected. Although total revenue increased by 50.2% year-on-year, Xuhui's gross profit margin in 2021 shrank 2.4 percentage points year-on-year to 19.3%, and core profit fell even more, down 9.2% to 7.3 billion yuan. We believe that this core profit has slightly disappointed the market, mainly due to the decline in profit margins and the reduced profit contribution from joint ventures. The management proposed a "cash + share" dividend to maintain a stable dividend ratio of 35%. The company's move is to retain more cash on hand, and this dividend distribution is likely to continue in the coming years.

Enter the green section. Xu Hui entered the green file under the "three red lines" for the first time. According to management, Xuhui's short-term debt ratio has fallen to 12% since the bond buyback in March 2022. In addition, Xuhui disclosed that the equity and debt of the cooperation project was 20.4 billion yuan by the end of 2021, down 19% from the middle of 2021.

Diversified business will accelerate. Under Xuhui's "concentric circle" strategy, we believe that the company will benefit from its enhanced diversified business through the cold winter. According to management, revenue from these non-development businesses is expected to account for about 30% and 40% of total revenue under the company's long-term vision.

The new target price is HK $5.40, maintaining the "buy" rating. We have lowered our target price to HK $5.40 to reflect the reduction in our profit forecast. However, considering Xuhui as a high-quality private housing enterprise, the valuation is attractive, we still maintain the "buy" rating. Our new target price corresponds to 5.1 times core price-to-earnings in 2022 and 0.8 times price-to-book ratio in 2022. The main risks are: 1) contract sales are lower than expected; 2) gross margins decline; and 3) aggressive land acquisition leads to leverage pressure.