1H20 performance is lower than we expected.

The first shares announced 1H20 results: operating income was 18 billion yuan, down 22% from the same period last year; net profit from home was 1.3 billion yuan, down 38% from the same period last year, lower than our expectations.

The company's lower-than-expected performance is mainly due to the lower-than-expected progress and gross profit margin of the real estate business. In the first half of the year, the profit-making area of the company's real estate sales fell 37% to 630000 square meters compared with the same period last year, and the settlement amount decreased 23% to 17.7 billion yuan. Affected by the high base in the same period last year (Beijing high gross profit project accounts for a high proportion of settlement), the company's after-tax gross profit fell 14.9 percentage points year-on-year to 17.8%, resulting in a more than 30% year-on-year drop in the company's homed net profit.

The cash expenditure of operating activities increased, and the financing cost went down marginally. Due to the increase in current payments and land auction deposits, the company had a net cash outflow of 3.1 billion yuan from operating activities in the second quarter (4.8 billion yuan in the same period last year), and a cumulative net outflow of 7.8 billion yuan in the first half of the year (5.8 billion yuan in the same period last year). The average financing cost of the company in the first half of the year remained low from 5.49 per cent in 2019 to 5.34 per cent in 15BP. At the end of the period, the company's cash on hand increased by 7% to 27 billion yuan compared with the end of last year, which is 0.9 times of the interest-bearing liabilities due within one year (the same as at the end of last year).

Trend of development

Sales are expected to remain stable throughout the year. The company's January July sales increased by 2% to 52.2 billion yuan compared with the same period last year, and the sales area increased by 1% to 1.81 million square meters compared with the same period last year. The corresponding sales price was 28876 yuan per square meter.

In 2020, the company plans to achieve contracted sales of 101.1 billion yuan (unchanged from the same period last year). We expect the company to achieve its sales target smoothly under the support of about 180 billion yuan of saleable value.

Take the land intensity up, deeply ploughing the core urban agglomeration. In January and July, the company's new land reserve increased by 52% to 2.25 million square meters compared with the same period last year, mainly distributed in the Yangtze River Delta / Beijing-Tianjin-Hebei / West Coast of the Straits / Guangdong-Hong Kong-Macau Greater Bay Area and other core urban agglomerations, accounting for 48%, 31%, 19% and 2%, respectively. During the period, the company acquired land strength of 125% (area caliber), which was significantly higher than that in 2019 (64%). We expect that the company will continue to expand the core area and optimize the soil storage structure.

Profits are expected to grow steadily for the whole year. We expect the settlement of the company's real estate sales to accelerate in the second half of the year, leading to a small positive increase in revenue for the whole year compared with the same period last year. Considering that the company's main settlement project this year is the two joint ventures of Xiamen Yitai and the first Vanke Real Estate, the annual investment income will be higher than the same period last year, driving the return net profit to increase by about 10% compared with the same period last year.

Profit forecast and valuation

Considering that the company's settlement progress is lower than we had expected, the 2020 Universe earnings per share forecast for 2021 will be reduced by 6% per share by 4% to 1.19pm 1.37 yuan. The company's current share price trades at 5.8 pound 5.0 times 2020 pound 2021 forward price-to-earnings ratio. Maintain the neutral rating and target price of 6.35 yuan, corresponding to 4.6 times 2020 pound 2021 target price-earnings ratio and 8% downside space.

Risk.

The progress of the carry-over was lower than expected; the gross margin for settlement fell by more than expected.