The two major challenges facing the company are the challenge of foreign currency liabilities and the asset challenge of low-tier cities. However, a good credit history, central enterprise background, and strong development capabilities are expected to help the company overcome the challenges. The company is deeply selective, and its competitive relative position in many regions has also improved markedly.
The decline in industry fundamentals has affected the company's performance, and profit margins have been suppressed. In the first half of 2023, the company achieved operating income of 27.2 billion yuan, -8.8%, gross profit of 4.4 billion yuan, -19%, corresponding gross profit margin of 16.3%, net profit of 1.7 billion yuan, year-on-year ratio of -29.8%, corresponding net interest rate of 6.3%. The company announced that it would pay an interim dividend of HK$0.05 per share. Due to the division of labor issues at the group level, the company's positioning focuses on second- and third-tier cities. If it does not enter first-tier cities, it will inevitably encounter market adjustments in low-tier cities.
The competitive landscape has further improved, and the market share has steadily increased. During the reporting period, the company's sales repayment was 26.4 billion yuan, the sales repayment rate was higher than 100%, and the net operating cash flow was 7.4 billion yuan. On the one hand, leading housing enterprises are focusing on core cities; on the other hand, the credit of large private enterprises is facing challenges. The company has become one of the few national brands of central enterprises that consumers in low-tier cities can choose from, and enjoys a certain advantage in competition. According to the company's announcement, in the first half of 2023, the number of cities with the company's top three sales volume was 17. Among them, there were 9 cities with the highest sales volume in the region, an increase of 1 and 3 over mid-2022, respectively. From January to July 2023, the company's cumulative contract sales were 28.3 billion yuan, and the contract sales area was 2.34 million square meters, up 20.8% and 5.1%, respectively, from the previous year. Of course, low-tier cities also generally face the challenge of insufficient real demand. Only by further selective and in-depth cultivation can the company expect to continue to develop with high quality.
Appropriately expand and develop mainstream products. By the end of June 2023, the company's total land storage floor area was 21.79 million square meters, and the ratio of land storage resources to sales area for the full year of 2022 was 5.8. In the vast majority of markets, there is no need to worry about the value of goods. In the middle of 2023, the central and eastern regions of the company's land storage resources accounted for about 51% of the area, and the total land storage equity ratio was 84%. During the reporting period, the company added 3 new land storage blocks in Hefei and Yinchuan, with a total investment amount of 3.6 billion yuan. The equity ratio was 100%, and the value of goods was increased by 7.5 billion yuan. The company is adding mainstream products in cities with better market conditions.
Maintain credit advantage and gradually improve the debt structure. As of mid-2023, the company had a total loan of 48.3 billion yuan, of which 13.4 billion yuan was due within one year. At the end of the reporting period, the company had a total cash reserve of 32.8 billion yuan. The margin of safety for continued debt repayment was sufficient. As of the end of June 2023, RMB loans accounted for 59% of the company's loan portfolio, and the exposure to foreign currency financing was indeed too high. In mid-2023, the company's total weighted average financing cost was 4.4%, down further from 4.8% at the end of 2022. During the reporting period, the company actively used instruments such as carbon-neutral bonds and corporate bonds to finance domestically. The financing cost was 3.05%-3.9%.
Risk factors: The timing and extent of the introduction of real estate support policies may fall short of expectations; the risk that future exchange rate fluctuations may have a potential negative impact on the company's debt structure; the risk that market sales pressure in some of the company's cities will continue to increase.
Profit forecasting, valuation, and ratings: The two major challenges facing companies are the challenge of foreign currency liabilities and the asset challenge of low-tier cities. However, a good credit history, central enterprise background, and strong development capabilities are expected to help the company overcome the challenges. Considering that the company's layout is still under strong pressure to remove financing costs, and that the risk of adjusting financing costs due to foreign currency liabilities still exists, we adjusted our forecast for the company's 2023/2024/2025 EPS to 0.91/0.89/0.83 yuan/share (the original forecast was 0.91/1.00/1.03 yuan/share). Referring to medium-sized credit companies, such as Longhu Group and Greentown China's market PE valuation 3.8 times to 5.0 times in 2023 (forecast by the CITIC Securities Research Department), it is comparable to the average PE multiplier 4.4 times, even though the company The regional layout is slightly inferior to comparable companies, but there is still a clear advantage in terms of credit. We gave the company 4.5 times PE in 2023, corresponding to a target price of HK$4.4 per share, and maintained a “buy” investment rating.