Persist in taking root in Henan. Jianye Real Estate, founded in 1992, as a real estate enterprise in Henan Province, has been rooted in Henan real estate market for the past 28 years. By the end of 2019, the company's business has covered 122 cities and counties above county level in Henan Province. By the end of June 2020, the total land reserve area was 52.65 million square meters. We believe that Henan can provide enough market space for the future development of the company.
And, we believe that, as a well-known brand in Henan Province, Jianye has the advantage of economies of scale and efficient operation in this region.
Diversified business development, become a new type of life service provider. The company integrates relevant property, education, hotel, football, commercial, green base and other resources to build a "private customized" service system, and is committed to becoming a new urban lifestyle service enterprise.
Since 2015, the company has carried out light asset business and continued to achieve brand output. In May 2020, Jianye New Life (09983HK) was listed in Hong Kong and is currently the largest property management service provider in the Central Plains.
Sustained recovery, there is still room for improvement. We believe that Jianye Real Estate continues to be on the road to recovery after doubling its income in 2019. We are confident that the company can achieve the target of 80 billion yuan in heavy asset contract sales in 2020, and expect the company's revenue / core shareholder profit to grow at a compound annual growth rate of 22.4% and 18.8% from 2019 to 2022. However, we believe that the company's share price is under pressure because of the decline in gross profit margin and higher interest payments. In the long run, the company has room for improvement.
For the first time, it covers giving a "collection" rating, with a target price of HK $4.20. Our target price represents a 70% discount to the company's 2020 net valuation of HK $14.01 per share. The target price corresponds to a core price-to-earnings ratio of 4.5 times for 2020. Main downside risks: 1) sales deterioration in Henan market, and 2) further decline in gross profit margin.
Risk factors.
Sales in Henan Province are likely to deteriorate. Jianye Real Estate is the largest developer in Henan Province. The company mainly focuses on Henan Province, and has a huge layout in Zhengzhou. The company may face the risk of a significant decline in sales in the region, mainly due to stricter real estate policies, pent-up demand for homes and fiercer competition. Moreover, the company's excessive concentration of land reserves in Henan has exposed the company to regional risks, which we believe may affect its housing sales and profitability.
Gross profit margin shrank significantly. The company's gross profit margin fluctuated in 2018, 2019 and the first half of 2020, with gross margins of 34.4%, 26.0% and 23.7%, respectively.
Its gross margin is likely to be under pressure due to rising average land costs and weak average sales prices. In addition to the cost of land and the average price of sales, other gross margins that may affect the company include higher labor and building materials costs. Our forecast for the company's profitability may be seriously affected by the decline in gross profit margin faster than we expected.
Financing costs are rising. The weighted average effective interest rates for the company's outstanding loans in 2017, 2018 and 2019 were 6.8%, 7.0% and 7.3%, respectively, showing an upward trend.
If the following factors occur, such as deteriorating cash flow, tighter financing channels or higher benchmark interest rates, the company's financing costs may rise. If the company's financing costs rise further, we think it may have a negative impact on the company's profitability and business performance.
Low-line cities in Henan are facing stricter regulation and control policies. At present, in addition to Zhengzhou, Henan other cities implement the real estate policy is relatively loose. However, given the company's huge land reserves in these cities (72.0%), possible regulatory policies in low-line cities such as Henan may have a huge impact on the company's business operations. Stricter purchase restrictions or mortgage policies in these cities could deal a severe blow to the physical market, especially among home buyers, which in turn affects contract sales, profits and cash flow of Jianye property.