1-3Q20 performance fell short of our expectations Shimao Co., Ltd. announced 1-3Q20 results: operating income of 12 billion yuan, down 20% year on year; net profit of 1.1 billion yuan, down 30% year on year, lower than our expectations, mainly due to: 1) development business settlement progress fell short of expectations, resulting in a year-on-year decline in operating income; 2) Three fee rates increased by 2.5ppt to 9.9%; 3) Unconfirmed fair value variable income, confirmed 450 million yuan in the same period last year. Leverage is marginal upward, and the financial side remains safe and stable. The company's net debt ratio increased to 23% at the end of the third quarter (the balance ratio after 17% advance payment at the end of the first half of the year increased to 65% compared to the end of the first half of the year (63%). The company's net cash outflow from operating activities in the third quarter was 500 million yuan. Cash on hand at the end of the period was -2% compared to the end of the first half of the year to 15.6 billion yuan, which is equivalent to 2.4 times the interest-bearing debt maturing within one year (1.6 times the end of the first half of the year). The development trend was positive in the third quarter, and the sales target for the whole year is expected to be achieved. The company achieved sales of 161 billion yuan in the first three quarters, which is basically the same as last year (-33%, -16%, and +68% in the first, second, and third quarters, respectively); the sales area was -21% to 610,000 square meters, corresponding to an average sales price of 26,393 yuan/flat. With continued sales of large-scale projects such as Zhuhai and Longgang, and the opening of new projects (Ningbo Panhuo Road and Fuzhou Difengjiang) in the fourth quarter, we expect the company to achieve a sales target of 27 billion yuan throughout the year, +11% year-on-year (implied +33% year-on-year in the fourth quarter). Land acquisition continues to be intense, and the equity ratio has increased. The company's land acquisition amount in the first three quarters was +9% to 14.7 billion yuan, accounting for 91% of current sales (86% last year), and the equity ratio increased to 51% (37% last year). We expect the company to continue its active land acquisition trend in the future, further increase the land acquisition equity ratio, and provide strong support for reaching the 2024 100 billion sales target (implying nearly 40% CAGE in 2020-2024). Short-term rental income is under pressure without changing the long-term growth trend. The company achieved cumulative rental income of about 490 million yuan in the first three quarters (about 14/17/180 million yuan in the first, second, and third quarters, respectively), and the comprehensive rental rate increased to 81% compared to the first half of the year (77%). With the steady increase in occupancy rates of Shimao Tower in Qianhai, Shenzhen and Shimao World Financial Center in Changsha, we expect the company to achieve annual rental income of about 670 million yuan (-7% year-on-year). The company plans to reach the target of 4 billion yuan in annual rental revenue (rental income+property management fees) of 4 billion yuan (1.2 billion yuan in 2019) in 2024. We believe that rent increases for ongoing projects in the commercial sector, the completion and entry of projects under construction, and the acquisition of external projects can provide strong support for the continued growth of the company's rental income. Profit Forecast and Valuation Considering that the company's performance carry-over pace may be slower than expected, we lowered our 2020/2021 profit forecast 22%/13% to 0.57 yuan/0.68 yuan per share. The company's current stock price trading is 10.2/8.6 times the predicted price-earnings ratio for 2020/2021. Maintaining a neutral rating, maintaining a target price of 5.13 yuan, corresponding to 9.0/7.5 times the target price-earnings ratio for 2020/2021, there is a 13% downside compared to the current stock price. Risk The scope and magnitude of the impact of COVID-19 has exceeded expectations; the carry-over progress has fallen short of expectations.