Profits fell by 51%. In 2012, turnover and net profit fell by 12.5% to 8.38 billion yuan respectively. ) and 51.2 to 1.082 billion yuan. Although the total floor area delivered increased by 3.0% to 1.04 million square meters, since most of the projects came from second-and third-tier cities, the average price of recognized income fell by 15.0% to 8040 yuan per square meter. And gross profit margin narrowed from 39.6% in 2011 to 22.9% in 2012. Excluding the revaluation income of investment property, the core profit in 2012 fell by 58.8% to 703 million yuan, and the actual basic profit was 40.5% lower than our expected 1.182 billion yuan.
January is a good start. The contract sales value and area increased by 259% to 1.5 billion yuan and 16.0% to 92774 square meters respectively in January 2013 compared with the same period last year. In January 2013, sales from the Shanghai area rose 2.7 times to 1.25 billion yuan, accounting for about 83.2% of the total contract sales, so the average selling price rose 210%, from 5231 yuan per square meter in January 2012 to 16202 yuan per square meter during the period. However, the company's management is cautious about the outlook, with a sales target of 11 billion yuan in 2013, the same as in 2012.
The gross margin guideline is more than 30%. Hengsheng says gross margins for projects from second-tier cities are much lower than those for projects in Shanghai and Beijing. Therefore, this will have a negative impact on its future profitability. Projects in Shanghai and Beijing account for 21.7% of the total land reserve of 16.2 million square meters. The company expects a future gross profit margin of more than 30%.
Short-term debt is a concern. Leverage is healthy, with a net debt ratio of 68.9% at the end of 2012. However, short-term debt repayment is a problem. By the end of 2012, the company had 3.3 billion yuan in cash (of which 2.3 billion yuan was restricted cash), but 6.1 billion yuan of debt matured within one year and 6.4 billion yuan of debt maturing in 1-2 years. In addition, the capital expenditure on land transfer and construction expenditure in 2013 is expected to be $900 million and $5.5 billion respectively.
Valuations are low, but earnings are also less observable. Due to the decline in gross profit margin and prudent sales targets, we have lowered our profit forecasts for 2013 and 2014 by 24.4% to 2.07 billion yuan and 23.8% to 2.37 billion yuan respectively. For the same reason, we lowered our forecast of net asset value per share from HK $7.2 to HK $5.24 at the end of 2013. Pre-sold but unrecognized revenue is 7.3 billion yuan, 80 to 90 percent of which can be recorded in 2013, indicating that we have locked in 48.5 per cent of our 2013 turnover forecast. The company's share price is equal to 5.0 times 2013 earnings or 68% discount to net asset value. Our target price has been raised from HK $1.08 to HK $1.31, which is a 75% discount to net asset value. The room for decline is 21.5%. Maintain the sell rating.