2021 performance is lower than we expected.

Huayuan Real Estate announced 2021 results: revenue of 13.7 billion yuan, an increase of 77% over the same period last year; net profit of-700 million yuan, down 262% from the same period last year, lower than we expected. The company plans to pay no dividend in 2021.

Lower-than-expected gross profit margin and lower-than-expected results due to inventory impairment. The completed area of the company during the period increased 41 per cent year-on-year to 141m square meters, leading to a 77 per cent increase in operating income, but the pre-tax / after-tax gross profit margin fell 9.9/8.4ppt to 170.3 per cent and 13.2 per cent respectively. During the same period, the company recorded an impairment loss of 1.6 billion yuan (660 million yuan in 2020) due to a large inventory decline (mainly related to Beijing Shijingshan, Foshan Sea Blue City, Changsha Sea Blue City, etc.), which together led to a performance loss, which was lower than expected.

The financial market has been actively optimized, and the three red lines have changed from "red file" to "yellow file". During the period, the company's interest-bearing liabilities decreased by 28% to 17.8 billion yuan compared with the beginning of the year, the three red line indicators improved significantly, the net debt ratio dropped sharply from 179% at the beginning of the year to 93%, and the cash-to-short debt ratio increased to 1.2 times (0.6 times at the beginning of the year). Deducting the pre-asset-liability ratio dropped to 73% (79% at the beginning of the year), turning into a "yellow file". The coupon rate of new bonds issued by the company in 2021 hit a record low (3.7%), and the average financing cost for the whole year decreased by 36bp to 6.32% compared with the same period last year.

Trend of development

It is planned to achieve 13.8 billion yuan in sales for the whole year. The company reached 10.2 billion yuan in sales last year, down 47% from the same period last year (affected by the pace of pushing goods in the fourth quarter and the downward trend of the market). We estimate that the total salable value of the company is about 40 billion yuan at present, and is expected to push 20 billion yuan in 2022. The company plans to achieve sales of 13.8 billion yuan in 2022, corresponding to 35% year-on-year growth and 70% removal rate. The company's sales in the first quarter of 2022 fell 9% year-on-year to 1.74 billion yuan (Kerry caliber), better than the industry's performance.

It is expected to become "green" by the end of 2022, keeping expenditure within the limits of income. The company will continue to reduce leverage by strengthening cost control and improving payback efficiency, and we expect the company to reduce the withholding asset-liability ratio to less than 70% by the end of 2022. The company added two new pieces of land last year, corresponding to an area of 390,000 square meters. We expect that this year the company will choose an opportunity to replenish high-quality land reserves while maintaining the safety of cash flow, continue to plough the layout of cities, and pay attention to the development opportunities of high-quality cities such as the Yangtze River Delta. In addition, the company plans to supplement the subsequent scale expansion through agent construction, agent operation and other ways.

Profit forecast and valuation

Considering that the company's profit margin is lower than expected and there is the possibility of potential impairment, we reduce our 2022 profit forecast by 68% to 173 million yuan, and introduce a new profit forecast of 174 million yuan in 2023. The current share price corresponds to a price-to-earnings ratio of 31.6 times earnings for 2022 prime in 23 years. Taking into account the market's upward risk preference for local state-owned enterprises with financing advantages, we maintain the company's neutral rating and target price of 2.15 yuan, corresponding to 29.1, 29.0 times 2022, 23-year price-to-earnings ratio and 8% downside.

Risk

The progress of the recovery of the industry boom is not as expected; the settlement profit margin is not as expected.