1H23 performance declined, and operating business recovered markedly; maintaining a “increase in holdings”, the company released 1H23 results: revenue of 26.8 billion yuan, -7% year-on-year; gross profit margin of 17%, year-on-year, -5pct; core attributable net profit -84% to 400 million; affected by the downturn in the industry and the decline in the share of first-level development revenue, the company's overall performance declined. Considering the carry-over of the development business, we lowered our revenue and gross margin assumptions and adjusted the company's 2023-25E EPS to 0.14/0.16/0.20 yuan (previous value:
0.17/0.18/0.21). Comparable companies' 2023E PE average value is 11.2 times (Wind unanimously expected). Considering that the company's unsettled gross margin is still low, we think the company's reasonable 223E PE is 10.1 times, adjusted the target price to HK$1.53 (previous value: HK$1.64), and maintained the “increase in holdings” rating.
Sales rankings and payouts have reached record highs, and land acquisition efforts have weakened
The company achieved sales volume of 86 billion dollars in the first half of the year, +23% year-on-year, ranking 11th in the industry, with a sales repayment rate of 106%, and first-tier and second-tier cities accounting for more than 88% of sales. Among them, Beijing, Shanghai, and Qingdao each contributed more than 5 billion dollars in sales, supporting the company's sales ranking and repayment rate to record highs. The company added 950,000 square meters of land storage in the first half of the year, corresponding to equity land prices of 12.5 billion yuan, -38%/-19% over the same period. Due to increased competition in the core urban land market in the first half of the year, the company's land acquisition efforts weakened somewhat. Considering that the company has completed 55% of its annual sales target in the first half of the year, plans to supply 160 billion dollars in the second half of the year, and has plenty of saleable resources, we think the company is expected to achieve the annual sales target of 155 billion dollars.
Operating business has clearly recovered, and investment will be increased in the future
On 1H23, the company seized the opportunity of market recovery, and its overall operating business ushered in a significant recovery: 1) Property rental revenue was 890 million, +24% over the same period last year. Among them, commercial operations achieved sales of 1.62 billion yuan, +125% year-on-year, commercial passenger flow of 30.82 million, +110% year-on-year, and the rental rate of newly opened commercial projects in 1H23 reached over 90%. 2) Hotel operating revenue was 1.07 billion yuan, +109% year on year, gross profit of 530 million yuan, +212% year on year, and EBITDA of 330 million, up 14% from the same period in 2019. According to the new management's strategic outlook for the future, the investment and revenue share of the company's undeveloped business will reach 15%/20% in 2027. In the future, we need to focus on changes in the company's operating business.
The debt structure continues to be optimized, and financing costs are expected to decline
By the end of 1H23, the company's “three red lines” remained at the green level, and all international credit rating agencies maintained the company's “investment grade” rating. The company's interest-bearing debt at the end of the period was 127.7 billion dollars, short-term debt accounted for 14%, and foreign debt exposure was 30%, respectively, down 8/7 pct from month to month. The average term of stock debt was 5.78 years. The company's debt structure continued to be optimized, yet the share of foreign debt was still relatively high, and there was room for pressure drop. The company's 1H23 financing costs are +0.61pct to 4.51% compared to 2022. The main reason for the increase in financing costs for foreign debt is the increase in foreign debt financing costs due to the Fed's interest rate hike. Considering that the company currently has 42.6 billion dollars in cash on hand, abundant liquidity, and the support for the company from the majority shareholders of central enterprises remains unchanged, we believe the company's financing costs will be expected to drop in the future.
Risk warning: 1) Sales growth falls short of expectations; 2) carry-over profit margin falls short of expectations.