1H20 performance is lower than expected.

Huaxia Happy reported 1H20 results, with operating revenue down 4 per cent to 37.4 billion yuan and net profit down 29 per cent to 6.1 billion yuan. The lower-than-expected results in the first half of the year are mainly due to: 1) the real estate settlement income decreased by 30% compared with the same period last year, and the real estate development income in the first half decreased by 30% year-on-year to 16 billion yuan (the delivery and settlement of real estate projects around Beijing lagged behind). The income from production and development increased by 11% to 13.2 billion yuan compared with the same period last year; 2) the financial expenses increased sharply, and the financial expenses increased by 232% to 2.3 billion yuan compared with the same period last year. 3) the profit and loss of minority shareholders increased more than fourfold (mainly due to the settlement of cooperative projects obtained in the previous period), leading to a 29% year-on-year decline in profits.

Trend of development

The land reserve margin has increased, but short-term property sales may still be under pressure, and revenue from the production and development business is expected to continue to grow. The amount of land taken by the company in the first half of the year increased by 96% to 24.2 billion yuan compared with the same period last year, and the amount of land to be developed increased by 20% to 12.74 million square meters compared with the beginning of the year. Taking into account the lack of salable value of the company and the downward trend of the epidemic rate, we expect that the growth rate of real estate sales for the whole year may still be under pressure (down 59% to 19.6 billion yuan in the first half of the year compared with the same period last year), and the growth rate of sales entering the market next year is expected to pick up with new projects. During the period, the settlement income of the industrial park increased by 38% over the same period last year to 19.8 billion yuan. We estimate that the current investment in the unlanded settlement park is more than 200 billion yuan (estimated by an 80% landing reduction factor), and the annual production and development revenue is expected to continue to grow by more than 30% compared with the same period last year.

The payback rate has increased, and the improvement trend on the financial side is expected to continue. The company's repayment rate during the period rose to 72% (61% last year), and the operating cash outflow after excluding land acquisition expenses was 5.1 billion yuan (1H19 outflow was 9.8 billion yuan). The net debt ratio at the end of the period was basically the same as that at the beginning of the year (207%) and the end of 1Q20 (201%). The cash short-term loan ratio decreased to 0.5 times (mainly due to the decrease in payback and the concentration of long-term debt). We expect the company to continue to optimize the payback and improve the financial quality. The rebate rate for the whole year is expected to continue to improve, and the sales payback growth will lead to a marginal decline in the annual net debt ratio. Considering the smooth financing channels of the company, we judge that the debt rollover pressure is not great, and the cash-to-short-loan ratio will pick up by the end of the year.

The commercial real estate business has actively acquired land and accelerated its development. During the period, the company obtained 4 commercial projects in Nanjing, Wuhan, Harbin and Guangzhou, with a total construction area of 2.1 million square meters, and won a bid for an agent construction project in Shenzhen, targeting a pre-service provider of an urban renewal project. During the period, the cash expenditure of commercial land acquisition was 6.8 billion yuan, accounting for 51% of the total land acquisition expenditure. The company has basically completed the target city layout in the current period, and we expect that we will continue to actively promote the project reserve and landing construction in the future, and the saleable part of the goods value is expected to continue to support the company's sales and profit growth.

Profit forecast and valuation

Keep the profit forecast unchanged. The share price is currently trading at 3.0 times 2020 Sterling's 2021 price / earnings ratio. Maintain its outperforming industry rating, lowering its target price by 11% to 20.00 yuan (mainly due to pressure on the company's annual sales growth), corresponding to a target price-to-earnings ratio of 3.6x 2020amp 2021 and 17% upside space.

Risk

The financing environment tightened more than expected; the property market policy in the main layout cities tightened more than expected.