The carry-over of Hongyang increased sharply in the first half of the year compared with the same period last year, with revenue rising 146.3 per cent to 9.62 billion yuan and gross profit margin of about 25.3 per cent. Excluding non-core items such as changes in the fair value of investment properties, we estimate that the company's core net profit is about 610 million yuan, up 21.7% from a year earlier. Although the growth rate of net profit has been affected by the decline in gross profit margin and project equity ratio, it is normal considering that the company is still in the growth stage. Hongyang strengthened the cash flow management of property development. In the first half of the year, the contract rebate rate reached 91%, effectively contributing to operating cash flow. By the end of June, the net leverage ratio decreased by 7.2 percentage points to 68.7% compared with the same period last year, down 1.7 percentage points from the end of last year. Hongyang's total sales from January to July was about 40.8 billion yuan, up 19.1% from the same period last year, outperforming its peers. We maintain our buy rating with a target price of HK $3.6 per share.

Summary of the report

Carry-over income rose. The carry-over of Hongyang increased sharply in the first half of the year compared with the same period last year, with revenue rising 146.3% to 9.62 billion yuan and gross profit margin of about 25.3% in the first half of the year. Although it fell 3.7 percentage points from the high level of 29.0% in the same period last year, it improved in the second half of last year, up 1.5% from the previous year. The proportion of sales and administrative costs to revenue fell 7.0 percentage points from a year earlier, resulting in an improvement in operating profit margins, which rose 3.3 percentage points from a year earlier and 2.4 percentage points from a month earlier to 16.3%. Excluding non-core items such as changes in the fair value of investment properties, we estimate that the company's core net profit is about 610 million yuan, up 21.7% from a year earlier.

Diversify the land. As of June 2020, the total construction area of Hongyang land reserve is about 1837 square meters, 73% of which are located in the Yangtze River Delta, 55% of which are located in Jiangsu, implementing the company's development strategy of deeply ploughing the Yangtze River Delta and expanding Jiangsu. Hongyang bought 3.07 million square meters of land storage in the first half of the year, with a total cost of about 19.7 billion yuan, accounting for 62% of the sales in the first half of the year (31.57 billion yuan). The investment ratio is slightly higher than the average in the industry, reflecting that the company is preparing for hundreds of billions of yuan of sales. In the newly acquired land reserves, mergers and acquisitions, commercial and residential linkage and the reserve price account for 45% of the total, resulting in relatively light costs, with an average land floor price of about 6408 yuan per square meter, further reflecting the comparative advantages brought by the company's deep farming in the Yangtze River Delta.

"residential + commercial" two-wheel drive development. Hongyang continues to develop commercial properties for medium-and long-term home ownership. In the first half of the year, the commercial building area in operation reached 500,000 square meters, and the construction area of the shopping center under construction and proposed construction reached 240,000 square meters. Commercial property investment brought the company a sustainable income of 213 million yuan in the first half of the year, up 14.5% from the same period last year. In order to balance the heavy capital investment in the commercial sector, Hongyang strengthened the cash flow management of property development, with a contract rebate rate of 91% in the first half of the year, effectively contributing to operating cash flow, and the cash-on-hand level rose 7.9% to 18.2 billion yuan compared with the same period last year. The net leverage ratio at the end of June fell 7.2 percentage points from a year earlier to 68.7 per cent, down 1.7 percentage points from the end of last year. The short-term debt ratio dropped to 36.8% month-on-month, the cash short-debt ratio was about 1.54 times at the end of June, and the debt structure was healthy.

Maintain the buy rating. Under the influence of health events, although the sales growth of Hongyang in the first half of the year was affected to some extent, thanks to the economic depth of the Yangtze River Delta region and its rigid demand for real estate, there was a significant improvement in the second quarter compared with the previous quarter, and sales in the first half of the year still recorded positive growth. Monthly sales in July increased by 130% compared with the same period last year. Hongyang's total sales from January to July were about 40.8 billion yuan, up 19.1% from the same period last year. Although the growth rate of net profit has been affected by the decline in gross profit margin and project equity ratio, it is normal considering that the company is still in the growth stage. We maintain our buy rating with a target price of HK $3.6 per share.

Risk tips: real estate regulation and control policies, economic downturn on sales pressure, repeated epidemic situation.