Results declined in '22, and the size of debt declined; the rating was downgraded to “increase holdings”

The company announced its 2022 results: revenue was -17.7% year on year to 430.4 billion yuan, and core net profit was -90.3% year on year to 2.61 billion yuan. Affected by inventory calculation impairment caused by the downturn in the industry, overall performance declined. Considering the impact of the industry downturn on the company's carry-over resources and unsold land reserves, we adjusted the revenue and gross margin assumptions and adjusted the 23-25E EPS forecast to 0.30/0.19/0.18 yuan (previous value of 23-24E: 0.68/0.66 yuan). Comparable companies' 2023 PE average value is 7.6 times (Wind's consistent expectations). The company's land storage is mainly located in the third and fourth tier. We think the company's 2023E PE is 6.9 times, corresponding target price of HK$2.34 (previous value: HK$3.67). However, since there is still some uncertainty about the sales recovery process in the third- and fourth-tier markets, the company's sales are still under some pressure and downgraded to “increase holdings”.

Sales in '23 are still under pressure. In the future, we need to pay attention to the company's replenishment situation. The company achieved equity sales amount of 357.5 billion yuan in '22, -36% compared to the same period last year. The company focused on repayment. The repayment rate was 93.5%, which remained above 90% for 7 consecutive years. There was a clear decline in the real estate market in '22, and the company invested relatively prudently. In '22, 980,000 square meters of equity land were added, and the corresponding equity land payment was 6.1 billion yuan, -98%/-96% over the same period last year. By the end of '22, the value of the company's equity soil storage was about 955.5 billion yuan. Land storage was relatively abundant, of which Tier 1 and 2 accounted for 39%. However, there was relatively little replenishment of goods by the company in '22, and its land storage was mainly in third- and fourth-tier cities. Sales may still face some uncertainty. In the future, we need to pay attention to the company's replenishment situation in key Tier 1 and 2 cities.

The scale of debt has declined, and the balance sheet has been restored

At the end of '22, the company's withholding balance ratio was 69.4%, falling below 70% for the first time in history. The net debt ratio was 40%, a new low in nearly 10 years. The short-term cash debt ratio was 1.6x, and the “three red lines” indicator was steady. Interest-bearing debt at the end of the period was 271.3 billion, down 15% from the beginning of the year. Of these, short-term debt accounted for 35%, and non-RMB debt exposure was 45%. The ratio was too high. In the future, attention should be paid to the risk of exchange rate fluctuations. The company's overall financing channels remained open. 2H22 successfully issued 1 billion winning tickets and carried out three allotments of shares, raising a total of HK$11.6 billion, effectively optimizing the asset structure. In January and March of this year, the company was approved with a deposit box registration quota of 20 billion yuan and a credit limit of 18.6 billion of corporate bonds on the Shanghai Stock Exchange, respectively. We are following the progress of subsequent issuance.

The Duoyuan business ushered in a harvest period. Future contract construction business or further development of the company's diversified business gradually entered a harvest period: 1) Robotics: By the end of January '23, the company's Bozhilin robot business had commercialized 33 construction robots, with a cumulative delivery volume of over 1,700 units, and a cumulative construction area of over 10 million square meters. 2) Contract construction: By the end of '22, a total of 152 projects had been undertaken, with a total management area of 12.71 million square meters. Of these, 5 new projects were acquired in '22, with a corresponding value of 8.5 billion dollars. 3) Investment: As of the end of '22, the book value of the company's equity portfolio was about 20 billion yuan, and 18% of the invested projects were successfully listed. We believe that the company has the DNA of the contract construction industry, and at the same time is leading the investment in construction technology, and the contract construction business is expected to gain further strength in the future.

Risk warning: 1) Sales recovery in third- and fourth-tier cities fell short of expectations; 2) Profitability and sales growth fell short of expectations.