FY19 performance is lower than market expectations.

The first shares announced the results of FY19 and 1Q20: in 2019, operating revenue rose 20 per cent year-on-year, while net profit fell 13 per cent year-on-year, much lower than market expectations; operating income and net profit fell 54 per cent and 13 per cent respectively in the first quarter of 2020.

The significantly lower-than-expected results in 2019 were mainly due to a slowdown in settlement in the fourth quarter and a decline in the proportion of high-margin and high-equity settlement items. In the fourth quarter of 2019, the growth rate of company settlement area decreased to 9% year-on-year (1~3Q19 growth was 32%), operating income fell 2% year-on-year, comprehensive after-tax gross profit margin was 25%, which was significantly lower than that in the previous third quarter (31%). Minority shareholders' profit and loss accounted for 62% of net profit (49% in 1~3Q19 and 30% in 4Q18, respectively). Full-year net profit finally recorded a 13 per cent year-on-year decline. Revenue in the first quarter of 2020 fell 54 per cent from a year earlier, and the consolidated after-tax gross margin fell 6 percentage points to 25 per cent compared with the same period last year.

Leverage is still high and financing costs are up. The company's net debt ratio rose from 200% at the end of 2019 (212% at the end of 2018) to 216% in the first quarter of 2020, a high level. The company's average financing cost rose to 5.49% at the end of 2019 (5.36% at the end of 2018). The company plans to pay a dividend of 0.4 yuan per share in 2019, an increase of 37% (33% in 2018).

Trend of development

Sales are expected to remain stable in 2020. In 2019, the signing amount / area of the company increased by 1% compared with the same period last year, respectively, to 101.3 billion yuan / 4.12 million square meters. In the first quarter of 2020, the amount / area of contracts signed increased by 23% compared with the same period last year to 12.6 billion yuan / 430000 square meters, respectively. In 2020, the company plans to achieve a contract value of 101.1 billion yuan, which is the same as the same period last year. We expect that under the support of the salable value of about 180 billion yuan, the sales target can be achieved smoothly.

It is expected that the proportion of settlement of high-equity projects will continue to decline in 2020 and drag down the growth of performance.

We estimate that the proportion of equity in completed projects in the company's 2019 table is 68%. In 2020, the proportion of completed projects in the company's schedule is only 55%, resulting in a further increase in the proportion of minority shareholders' profit and loss in net profit, thus dragging down the growth of homed net profit.

Profit forecast and valuation

Taking into account the impact of the epidemic on the settlement progress of real estate completion and the decline in the settlement proportion of high-equity projects, we downgrade the earnings per share forecast for 2020max 2021 by 19% to 1.27pm 1.42 yuan.

The current share price corresponds to a price-to-earnings ratio of 5.2 times 2021 / 4.7 times earnings. Maintain the neutral rating and downgrade the target price by 19% to 6.35 yuan to reflect the earnings forecast adjustment, corresponding to 5.0 times / 4.5 times 2020 Universe 2021 target price / earnings ratio, which is 4% lower than the current share price.

Risk.

The regulation and control policies of key cities tightened more than expected; the delivery progress of the company was lower than expected.