Performance review

1H22 performance meets expectations

The company announced its results for the first half of 2022: its operating income was 7.1 billion yuan, down 79% from the same period last year; its net profit loss was 1.42 billion yuan, down 268% from the same period last year, which was basically in line with the previous performance forecast (13-1.4 billion yuan in net profit loss).

The profit caused by small delivery volume, rigid cost and loss of joint venture project is negative. Affected by the settlement cycle, the company's profit-making area decreased by 72% in the first half of 2022 compared with the same period last year, resulting in a nearly 80% drop in operating income compared with the same period last year. Although the after-tax gross profit margin (13%) is basically the same as the same period last year (15% for the whole of 2021), the three expense rates significantly increased to 31% year-on-year (of which the sales / management / financial expense rate increased by 3/5/16ppt respectively) The decline of gross profit margin of superimposed joint venture projects led to a negative investment income, a higher base of fair value change income and asset disposal income in the same period last year, and finally a loss of 1.4 billion yuan in the company's return net profit.

Trend of development

Sales for the whole year are expected to outperform the industry as a whole. The company achieved sales of 43.5 billion yuan in the first half of the year, down 34% from the same period last year (Top50 real estate company Kerry's overall sales fell by 50%), and the corresponding sales ranking rose 16 places to 22 places compared with the end of 2021. The company has ample sales value and high-quality layout throughout the year. We expect the company to continue its active sales strategy in the second half of the year, and its annual sales performance is expected to be better than that of the industry as a whole.

Continue to optimize the financial side and choose the opportunity to supplement high-quality projects. In the first half of 2022, the company reduced the balance of interest-bearing debt to 120 billion yuan through debt repayment, and the proportion of short-term debt decreased to 11% (16% at the end of 2021), driving the net debt ratio, deducting pre-debt ratio and cash-to-short debt ratio to 145%, 72% and 1.43 times, respectively. In the first half of the year, the company acquired a new Beijing project with a total land price of 4 billion yuan and an average floor price of 42774 yuan per square meter. Looking forward, we expect the company to adhere to the strategic layout of ploughing Beijing while optimizing financial indicators, and to supplement high-quality land reserves in Beijing through joint land acquisition, equity acquisition and other ways.

Full-year results are expected to turn losses into profits. Considering that the company has abundant resources (15% to 63.8 billion yuan in advance at the end of the first half of 2022 compared with the end of 2021), and the completion plan for the second half of the year accounts for a relatively high proportion of the whole year (1.24 million square meters completed in the first half, only 23% of the completion plan for the whole year), we expect the company's annual operating income to be flat compared with the same period last year. In addition, with the gradual completion of the low gross profit project, the company's pre-tax settlement gross profit margin is expected to stabilize at about 18%; the superimposed first profit letter can further increase the profit by withdrawing from the investment project, and the company's annual return net profit is expected to turn from loss to profit.

Profit forecast and valuation

Taking into account that the investment income contributed by the company's joint venture project may be lower than we had expected, the company's 2022 prime net profit in 2023 will be reduced by 18% of the company's 2023 net profit by 20% to 62.0 million yuan. The current share price corresponds to 18.0 times 2022 / 2023 / 17.1 times earnings. Maintain the neutral rating and cut the target price by 18% to 5.07 yuan to reflect earnings adjustment and a decline in investors' risk appetite in the sector, corresponding to a price-to-earnings ratio of 21 times / 20 times 2022x2023, which has 17% upside compared with the current share price.

Risk.

The recovery rate of industry prosperity is slower than expected, and the scale of development and settlement and profit margin are lower than expected.