1H23 performance meets market expectations
China overseas Hongyang Group reported 1H23 results that revenue fell 8.8 per cent year-on-year to 27.2 billion yuan, gross profit margin rose 1.9 percentage points to 16.3 per cent compared with 2022, and net profit fell 29.8 per cent to 1.72 billion yuan from a high base, in line with market expectations. The company declared an interim dividend of HK $0.050 per share with a dividend yield of 9.5 per cent (1H22 7.5 per cent) and a corresponding dividend yield of 1.6 per cent.
The indicators of the three red lines have been improved, and the advantage of the financing side is outstanding. Thanks to efficient payback (1H23 cash rebate of 26.4 billion yuan, payback rate of 102%) and operational efficiency (1H23 operating cash flow of 7.4 billion yuan), the company's cash on hand at the end of 1H23 reached an all-time high of 32.8 billion yuan, the pre-debt ratio and net debt ratio decreased by 1.6% and 8.3ppt to 67.2% and 40.5% respectively compared with the end of 2022, and the cash short-term loan ratio (excluding restricted funds) increased to 1.8 times (1.6 times at the end of 2022). Maintain the "green gear". The average financing cost of a company's 1H23 rose 0.2ppt to 4.4 per cent from 2022, mainly due to a rise in HIBOR during the year (33 per cent of Hong Kong dollar loans). Thanks to the background of central enterprises and all-investment-grade credit ratings, the company issued three credit bonds totaling 2.7 billion yuan in the first half of the year, with weighted average financing costs of 3.7 per cent and domestic average financing costs falling by 0.7ppt to 4.2 per cent. In response, the company plans to reduce its foreign currency debt pressure to less than 35 per cent by the end of 2023 (41 per cent at the end of 1H23).
Keep expenditure within the limits of income to replenish high-quality soil reserves. In the first half of the year, the company adhered to the development and storage principle of "mainstream cities, mainstream lots and mainstream products". A total of 3 plots (2 pieces of Hefei and 1 piece of Yinchuan) were obtained, with a total value of 7.5 billion yuan, a land premium of 3.6 billion yuan and a land acquisition intensity of 17%. We estimate that the gross profit margin of the above new projects is 15-20% on average. By the end of 1H23, the total land storage area of the company was 2179 square meters (51% in the east and 25% in the middle), and the proportion of equity was 84%. We estimate that the unsold value is about 170 billion yuan, which is enough to support the development of the company in the next three years.
Trend of development
There is ample supply in the second half of the year, and sales for the whole year are expected to grow flexibly. The company's 1H23 sales increased by 25 per cent year-on-year to 25.9 billion yuan, which is similar to that of the central state-owned enterprises, which are mainly in the first and second line of land storage. Thanks to strong product strength and state-owned capital background, the company's market share in the cities where 1H23 is located has steadily increased (the overall sales growth rate in the cities where 1H23 is located is 2-3%), and the number of cities with the largest sales volume has increased by 3 to 9 cities compared with 2022. The company plans to supply a total of 90 billion yuan in the second half of the year (of which the new push is about 16 billion yuan). If the annual removal rate increases to 38% compared with 2022 (the previous year's removal rate is basically higher than 50%), it can achieve 10% positive sales growth (implied 2H23 removal rate 20% monthly sales of 3.2 billion yuan in August-December, compared with 4 billion yuan in January-July).
Profit forecast and valuation
Maintain profit forecasts and outperform industry ratings. Taking into account the recent weakness in investor risk appetite, the target price was cut by 18% to HK $4.53, corresponding to 4.5 times 2023 Universe's 2024 price-to-earnings ratio and 42% upside. The current share price trades at 3.1 times 2023 Universe 2024 p / e.
Risk
The progress of sales recovery is not as expected; the settlement scale or profit margin is worse than expected.