Focus of opinion

Investment suggestion

We downgraded Baolong's commercial rating to neutral.

The reasons are as follows:

The continuous pressure on the operating performance of the parent company and the fermentation of credit risk events bring great uncertainty to the company. The high-frequency data we monitor show that the cumulative year-on-year decline in the area of new home sales in the first four weeks of June has narrowed to-31% compared with May (- 54%). However, Baolong real estate sales performance is still low (according to Kerry, June single-month sales year-on-year-60% January-June cumulative year-on-year-56%), suppressing its capital recovery efficiency. In addition, Baolong Real Estate announced on July 4 that it was seeking a debt rollover for a total of US $500 million of foreign debt maturing in July and November 2022, taking into account that it still has a large debt maturity pressure during the year (we estimate that about 2.9 billion yuan of domestic debt will be matured or sold back in July-August), superimposed by some overseas rating agencies that have recently downgraded the company's credit rating and outlook, we believe that there is uncertainty about the development of its credit risk events. As far as Baolong Business is concerned, we believe that, on the one hand, the long-term growth momentum may be dragged down by the uncertainty of the parent company's project delivery, and the parent company's potential actions to deal with cash flow risks may create additional uncertainty on the company's day-to-day operations; on the other hand, company valuations may remain under pressure until the parent company's credit risk events become clear.

The financial pressure of the parent company superimposed the disturbance of the epidemic situation, which was a drag on the short-term performance of the company. We expect the company's revenue to grow by about 16% and net profit to grow by about 22% in the first half of 2022. The main considerations are as follows: 1) the start pace of the parent company's follow-up projects may slow down due to its financial pressure, affecting the company's pre-opening consulting service income. 2) the company ploughed deeply and grew three corners. Under the disturbance of the epidemic in the first half of the year, some shopping malls closed for about 2 months, dragging down the company's income from diversified operations and parking lot management, and the pressure on the operating performance of shopping malls (we estimate that the retail sales in the first half of the year are about 10% of the same store as the same store.) the marginal rental rate of shopping malls will also affect the management income of the company's tenants. Looking forward to the whole year, considering the uncertainty of the epidemic disturbance and the potential rent reduction policy in the areas affected by the epidemic, we believe that the growth rate of performance in 2022 may be lower than previously expected.

What is the biggest difference between us and the market? We believe that under the financial pressure of the parent company, the company's short-term performance and medium-and long-term growth momentum will also be under pressure.

Potential catalyst: credit risk events of the parent company continue to have an impact on the company's operating performance.

Profit forecast and valuation

We downgrade the company's profit forecasts for 2022 and 2023 by 11% and 19% to 530 million yuan (+ 20% year-on-year) and 640 million yuan (+ 22% year-on-year), mainly considering the financial pressure on the parent company or slowing down the pace of project opening, and the epidemic disturbance suppresses the performance of mall operations. The downgrade to neutral and the target price cut of 17 per cent to HK $5.8 (corresponding to 6 times 2022 price-to-earnings ratio and 13 per cent upside) mainly reflect the adjustment in earnings forecasts and increased uncertainty about long-term growth. The company trades at 5.4 times 2022 earnings.

Risk.

In 2022, the performance of the project extension exceeded expectations; the parent company's project delivery pace exceeded expectations.