The 2021 results fell short of our expectations
Zhongnan Construction announced its 2021 results: revenue of 79.2 billion yuan, up 1% year on year, net profit loss of 3.4 billion yuan, down 148% year on year, lower than previous performance forecasts (71-2.12 billion yuan, down 70-90% year on year) and our expectations (mainly due to profit margins falling beyond expectations), without dividends in 2021.
Multiple factors have led to a loss in performance. The company's gross margin for real estate business settlement fell 8.5ppt to 10.7% in 2021, mainly due to the fact that 4Q21 discount sales of existing homes were settled in the current period and lowered the overall gross margin level. Asset impairment losses increased fivefold to 3 billion yuan over the same period, and credit impairment losses due to bad debts such as accounts receivable and notes receivable rose to 820 million yuan (50 billion yuan in 2020). At the same time, due to the failure of joint venture revenue to be confirmed as scheduled, the company's investment income fell 55 percent to 1.9 billion yuan year-on-year. The above factors combined caused the company's 2021 performance to shift from profit to loss.
Financial indicators came under pressure, and the three red line indicators fell to the “orange level.” The company's year-end interest-bearing debt fell 22% to 62.3 billion yuan from the beginning of the year. Due to a sharp cash outflow of 23.7 billion yuan from fund-raising activities (inflow of 13.7 billion yuan in 2020), the company's cash on hand fell 32% at the end of the year. The company's net debt ratio at the end of the year fell 4ppt to 93% from the beginning of the year, but the withholding balance ratio rose 1.8ppt to 80.5% from the beginning of the year, and the short-term cash debt ratio fell 0.6 times (excluding restricted capital), falling from the “yellow tier” to the “orange level”. We reminded investors to continue to pay attention to the company's subsequent cash flow safety and changes in financial indicators.
Development trends
Sales growth is expected to stall in 2022, and subsequent growth is under pressure. The company's unfinished land storage area at the end of 2021 fell 8% year-on-year to 41.35 million square meters. We estimate that the sales coverage factor for the corresponding saleable soil storage was less than 2 years. At the same time, when industry sentiment is at the bottom and private enterprise refinancing is still under pressure, we believe that the company's subsequent business strategy will focus on securing sales, promoting repayments, removing inventory, and controlling expenses. Investment in land acquisition will remain cautious until the industry sees a clear recovery, and land storage abundance may decline further in the future. The company's sales volume in 2021 fell 12% year on year to 1974 billion yuan, and the first quarter of 2022 fell 66% year on year to 163 billion yuan. We expect that the company's sales scale may continue to decline throughout the year and face “passive downsizing”
The possibility is that medium- to long-term growth is expected to be under pressure.
Profit forecasting and valuation
Considering that the company's subsequent settlement profit margin is under pressure and that there is still a risk of impairment, we lowered our 2022/2023 profit forecast by 84%/84% to 25/270 million yuan, reversing loss/increasing 7% year-on-year. Maintaining a neutral rating. As the company's performance turned to losses, we used the NAV discount method to price the company. The company is currently trading a 59% NAV discount; considering the rising risk appetite in the sector, we lowered the target price by 9% to 3.51 yuan, corresponding to the 60% target NAV discount and 2% downward space.
risks
The industry financing environment has tightened beyond expectations; the recovery of industry sentiment has fallen short of expectations.