1H23 performance is in line with market expectations
Midea Real Estate announced 1H23 results: Revenue increased 15% year on year to 36.3 billion yuan, gross margin gradually declined to 13.2% due to inventory impairment of 1.74 billion yuan (1H23 gross margin fell 1.1 ppt to 18.0% year on year if inventory impairment was not taken into account), and return core net profit fell 48% year on year to 860 million yuan on a higher basis, in line with market expectations. The company did not announce an interim dividend, which is consistent with previous years.
Strictly abide by the bottom line of financial security. Thanks to efficient repayment (cumulative repayment rate of 98%) and restraint in land acquisition, the company's three red line indicators up to the end of 1H23 remained in the “green zone”. The withholding debt ratio and net debt ratio fell 0.3 and 4.1 ppt to 67.9% and 39.8%, respectively, compared to the end of 2022, and the short-term cash loan ratio (excluding restricted funds) was 1.49 times. As an exemplary private enterprise, the company is supported by regulators and exchanges on the financing side. Since the beginning of the year, the company has issued a total of 2.12 billion yuan in votes, with a weighted average interest rate of 4.16%. Furthermore, the company expects to issue Chinese bonds again in the near future to increase credit and win votes, and the scale is expected to be 6-1.5 billion yuan. By the end of 1H23, the company's average financing cost had stabilized at a low level of 4.68%. The pressure on the company's open market debt to maturity during the year was manageable, leaving only 84 million yuan of corporate bonds to be repaid.
The soil storage structure continues to be optimized. In the first half of the year, the company focused on obtaining high-quality land in core cities such as Guangzhou, Foshan, and Changsha, corresponding to an additional equity value of 3.8 billion yuan. Furthermore, stock land storage equity cuts have continued to advance. Since September 2021, the company has acquired shares in 17 high-quality projects, and at the same time removed shares in 23 low-energy urban projects. The corresponding equity value has increased by 6.5 billion yuan (1H23 net increase of 600 million yuan), driving the land storage equity ratio to 72%. As of the end of 1H23, 67% of the company's unsold land storage area was distributed in second-tier cities and above, and 52% in the Yangtze River Delta and Greater Bay Area; we estimate that the company's unsold value is about 250-260 billion yuan, which can support sales development over the next 3 years or so.
Development trends
Sales are expected to exceed 70 billion yuan in 2023. The company's 1H23 sales amount increased 1% year over year to 40.6 billion yuan. The company plans to supply more than 100 billion yuan in the second half of the year (with an average monthly increase of 5-6 billion yuan). We believe that with the gradual implementation of subsequent demand-side support policies, the company's promotion and removal rate will have some upward elasticity. We believe that the company's annual sales volume is expected to reach more than 70 billion yuan (2H23 can achieve annual sales of about 70 billion yuan if the removal rate reaches 30%).
Profit forecasting and valuation
Maintaining the profit forecast, the company is currently trading at 4.8/4.7 times the 2023-24 price-earnings ratio. Maintaining an outperforming industry rating, considering the slow progress in restoring industry fundamentals and weak investor sentiment, the target price was lowered by 15% to HK$10.24, corresponding to 6.7/6.4 times the price-earnings ratio for 2023-24 and 38% upside.
risks
The recovery in industry sales sentiment fell short of expectations; settlement profit margins declined more than expected.