1H20 performance is lower than we expected.

Chinese enterprises announced 1H20 results: operating income was 5 billion yuan, down 46% from the same period last year; net profit from home was 600 million yuan, down 64% from the same period last year, lower than our expectations.

The lower-than-expected performance of the company is mainly due to the fact that the epidemic affects the carry-over rhythm of real estate business and rental income of holding properties. In the first half of the year, the company's real estate sales revenue and real estate rental income fell 48% and 31% respectively compared with the same period last year, resulting in a more than 40% drop in operating revenue compared with the same period last year. During the period, the company's after-tax gross profit margin fell to 33.4%, the three expense rates rose 2.0ppt to 6.7%, minority shareholders' profit and loss accounted for 48% of net profit (22% in the same period last year), and the final homed net profit fell by more than 60% compared with the same period last year. If non-recurrent gains and losses such as investment income (142 million yuan) realized by the transfer of Shanghai Xingxin real estate equity are deducted, the company's net profit after deducting non-return will drop 77% to 400 million yuan compared with the same period last year.

The cash-to-short-debt ratio decreased, while the net debt ratio rose marginally. In the first half of the year, the company realized a net cash outflow of 1.1 billion yuan from operating activities (compared with 900 million yuan in the same period last year). At the end of the period, the company's cash-on-hand fell 24% to 10.3 billion yuan from the end of 2019, which was 2.3 times the interest-bearing liabilities due within one year (7.2times at the end of last year), and the net debt ratio rose to 28% (20% at the end of last year).

Trend of development

Sales for the whole year are expected to record negative growth compared with the same period last year. The company achieved a cumulative sales amount / sales area of 4.43 billion yuan / 65000 square meters in the first half of the year, which decreased by 33% and 52% respectively compared with the same period last year, and the corresponding average sales price increased by 39% to 67851 yuan / square meter (mainly because the proportion of sales in Shanghai increased to 92% from 47% in 2019). The company's main projects this year (Shanghui Family, Binjiang Yuefu and Banshan No.1, etc.) are located in the core areas of central cities such as Shanghai, Wuxi and Suzhou. We expect the company to actively promote the market in the second half of the year, and sales are expected to pick up. Year-on-year sales decline will be narrower than in the first half of the year.

Rental income of holding property is under short-term pressure. In the first half of the year, the rental income of company-owned properties reached 210 million yuan, down 31% from the same period last year (mainly due to rent reduction for tenants during the epidemic). Looking ahead, we expect the decline in rental income in the second half of the year to narrow to low single digits (down 45% in the first quarter and 18% in the second quarter, respectively), and a year-on-year decline of 10% to 20% for the full year. In the future, with the location of China Enterprise International Financial Center, China Enterprise Fortune Century Building and China Enterprise Future Century Building, office buildings in the core area of Shanghai have been completed to enter the market, and the company's rental income is expected to increase year by year, contributing to stable cash flow and profits.

Profit forecast and valuation

Considering that the company's full-year carry-over progress and rental income may be lower than we had expected, we downgrade our earnings per share forecast for 2020 / 2021 by 24% to 0.39exp. 43 yuan. The company's current share price trades at 9.9 times forecast 2020 / 2021 earnings. Maintain the neutral rating and lower the target price by 16% to 3.91 yuan, corresponding to a target price-to-earnings ratio of 10.0% to 9.1 times 2020, which is 9% lower than the current stock price.

Risk

The scope and extent of COVID-19 's epidemic situation exceeded expectations, and the progress of carryover was not as expected.