Performance review
Maintain neutrality
The interim results are in line with the previous profit warning.
China Evergrande Group announced results for the first half of 2019: the company disclosed that core profit fell 45% year-on-year to 30.35 billion yuan, while implied equity core net profit fell 48% year-on-year to 16.73 billion yuan.
Gross profit margin fell in the first half of the year. Gross margin in the first half of the year was 34% (down 2.2% from a year earlier), and the company's investment in new energy vehicles led to increases in three fees (7% of sales, up from 5% in 2018) and suppressed net profit margins.
The financial situation is under further pressure. Land payments accounted for only 33% of sales rebates in the first half of the year, but construction expenditure (91 billion yuan) and investment in new energy vehicles (about 14 billion yuan) still put pressure on the balance sheet. The net debt ratio at the end of the period is 152%, and the coverage ratio of cash on hand to short-term debt is only 0.77 times.
Trend of development
The sales target of 600 billion yuan in 2019 (a year-on-year increase of 9%) may be met. Sales in the first half of the year totaled 282 billion yuan. Looking forward to the second half of the year, we believe that the target may be achieved, but profit margins and payback conditions may deteriorate, and the real estate market in low-line cities faces downside risks.
We expect profits to fall 25 per cent year-on-year in 2019 and 8 per cent in 2020. Contract liabilities have declined significantly since 2018, further shrinking to 120.5 billion yuan by the end of the first half of 2019 (while development business settlement income reached 221 billion yuan in the first half of 2019). In addition, we believe that the company's sales quality may continue to deteriorate in the second half of the year, which may not be enough to support the company's profit release.
Profit forecast and valuation
We cut our profit forecasts for 2019 and 2020 by 25% and 23% to 36.5 billion yuan (down 25% from the same period last year) and 33.6 billion yuan (down 8% from the same period last year), mainly reflecting adjustments in revenue and profit margins.
Maintain a neutral rating and lower the target price by 39 per cent to HK $15.12 (corresponding to 5x and 5.5x 2019 and 2020 P / E ratio, 50 per cent NAV discount, 13 per cent downside from the current share price), mainly reflecting earnings per share adjustment. The company currently trades at 5.8x and 6.3x 2019 and 2020p / e, with a 43 per cent NAV discount.
Risk.
The company's sales and profit performance exceeded our expectations.