Core net profit in 2022 is basically in line with market expectations

Country Garden announced 2022 results: revenue was -17.7% year-on-year to 430.37 billion yuan. Due to the centralized carry-over and increase in impairment of the company's low margin projects last year, combined with net exchange losses due to exchange rate fluctuations, core net profit was -90.3% year-on-year to 2.61 billion yuan, which is basically in line with Profit Police. The company did not pay dividends in 2022.

Take multiple measures to support the financial situation and repair the balance and liability structure. On the management side, the repayment rate of equity sales reached 93% last year, and the expenditure side saved land (equity land acquisition amount was 6.1 billion yuan) and focused on delivery. Operating activities achieved a positive surplus of 35.62 billion yuan in 2022. At the same time, the company accurately managed slow-flow, low-yield projects, and the net cash flow from investment activities reached 4.41 billion yuan in 2022. As a result, there was a steady downsizing during the year. Cash on hand at the end of the year fell to 147.55 billion yuan from 181.3 billion yuan at the beginning of the year, interest-bearing debt fell 15% to 271.3 billion yuan during the year, and the average financing cost rose moderately to 5.73%. At the end of 2022, the withholding balance ratio (excluding contract liabilities and related taxes on items to be resold) and net debt ratios declined marginally to 69.4% and 40.0%, and the short-term cash debt ratio fell 1.6 times. We expect the company's combined construction and security expenses to be about 200 billion yuan this year (about 237.3 billion yuan last year), which will be mainly supported by sales and repayment. The financing company has resold or matured domestic bonds of about 22.1 billion yuan during the year, and no foreign debt has been resold or matured. Compared with the 20 billion yuan of winning votes approved in January of this year, it has also received more than 300 billion yuan of intentional comprehensive credit support from dozens of banks.

Development trends

Flexible supply to seize opportunities in the new housing market. At the end of 2022, the company obtained equity with a saleable value of about 955.5 billion yuan, and the potential equity saleable value of 252.8 billion yuan (we estimate that about 20 billion yuan will mature and land within the year). Considering that the recovery process in the new housing market is still early, and that the company's business exposure is relatively large compared to its peers in low- and middle-energy cities, we think there is still uncertainty about when the company's cumulative sales stabilized steadily year over year in a single month during the year. In January-January of this year, the company achieved equity sales of 46.9 billion yuan, a year-on-year decrease of -32%. Combined with sales in the first two months of the historical year as a proportion of the whole year, the company's sales performance at the beginning of this year indicated an annual sales volume of about 2800-300 billion yuan.

The new chairman of the board is at the helm, and the strategy of “one two wings” is still being implemented with a steady and far-reaching attitude in the medium to long term.

The company plans to focus its land storage and assets on high-energy cities. Since the beginning of the year, it has restarted opportunistic participation in land photography in Beijing, Nanjing, Chengdu, Hangzhou, Hefei and other places. Based on its full-chain service experience, cost power and product strength refinement, complemented by management structure optimization and streamlining to act as execution guarantee, as the “two wings” strategic focus, the asset-light business represented by managed construction and the technology construction business, which is expected to become the second growth curve, may become the main starting point for the company's diversified development.

Profit forecasting and valuation

Considering that the company's sales and profit margins are still in the bottom-finding stage, we lowered the 2023 core net profit forecast by 76% to 3.12 billion yuan, and introduced the 2024 core net profit forecast of 3.08 billion yuan, corresponding to the 2023/24 year-on-year growth rate of 19.5%/-1.3%. The company's current stock price is trading 16.6/16.3 times the 2023/24 price-earnings ratio. We maintain a neutral rating. Considering the marginal optimization of the company's balance and liability structure and abundant supply, which is expected to support flexible supply, the target price was lowered by 8% to HK$2.56, corresponding to 19.2/18.8 times the 2023/24 price-earnings ratio and 15.8% upward space.

risks

The progress and extent of sales recovery fell short of expectations; repayments fell short of expectations, putting pressure on the company's cash flow.