Increasing revenue does not increase profits; intensive management reduces costs. In the first half of 2023, the company achieved operating income of 36.34 billion yuan, +14.8% year-on-year; net profit to mother was 782 million yuan, or -49.2% year-on-year. As of the end of June 2023, the company's gross margin and net margin were 13.2% and 2.2% respectively, -4.7 percentage points and -2.7 percentage points year-on-year, respectively. We believe that the main reason for the decline in gross margin was due to the high unilateral cost of confirmed projects and increased impairment provisions for property development projects showing signs of impairment. Furthermore, through intensive management, the company steadily controlled group management and sales expenses in the first half of '23.

Seize repayments and focus on deepening the cultivation of excellent storage. In the first half of '23, the company achieved total contract sales of 40.6 billion yuan, corresponding sales area of 3.21 million square meters, and the contract repayment rate increased to 98%. In order to implement the deep regional strategy, the company's layout in the Greater Bay Area and Yangtze River Delta Economic Zone contributed nearly 70% of its performance. The average sales price increased by 3% to 12,653 yuan/㎡, and the urban upgrading strategy reached the next level. By the end of June '23, the company's land storage area equity ratio had increased to 72%, up 3% from the beginning of '22. Among them, second-tier cities and above account for 67% of land storage. In the first half of '23, the company acquired new high-quality land plots in core cities such as Guangzhou, Foshan, and Changsha, with an equity value of about 3.8 billion yuan, adding momentum to subsequent high-quality development.

Diversified businesses have achieved profitable scale growth, and the share of external development continues to increase. On the property side, the contract area for Midea Services was 91.14 million square meters as of the end of June '23. A total of 21 low-quality projects (of which 3 were voluntarily removed in the first half of '23), the total clearance area was 3.23 million square meters, insisting on steady acquisition of high-quality projects and achieving quality management. On the commercial side, in the first half of '23, American Commercial had an operating area of over 700,000 square meters, 9 shopping malls, a full floor rate of 92%, and cumulative sales of 1.4 billion yuan, +27% over the same period last year. In terms of the Ruizhu series, Ruizhu Construction Technology added a contract amount of 400 million yuan in the first half of '23, and the third party business accounted for 100%. Furthermore, Ruizhu Construction Technology's MIC modular construction products have been certified by the Hong Kong Technical Standard System. Through the Hong Kong Supply Alliance and channel cooperation, orders for modular construction products of not less than HK$500 million per year will be locked in for the next 3 years.

The liquidity is sufficient and the ability to repay debts is strong. By the end of June '23, the company's net debt ratio had fallen to 39.8%; the short-term cash debt ratio excluding restricted cash had stabilized at 1.49, and the withheld balance ratio had declined steadily to 67.9%; it held $23.8 billion in cash, had a bank credit limit of $151.7 billion, an unspent bank credit line of $111.8 billion, and had abundant cash and financial resources. In the first half of '23, the company's financing costs remained low, with a weighted average financing cost of 4.68%; it also successfully issued 1.2 billion yuan and 920 million yuan medium-term notes in April and August, respectively. Excellent financing capacity strengthened strong financial strength, and there were no dollar bonds.

Investment advice. Maintain an “better than the market” rating. Considering the company's significant advantages on the financing side, the land storage structure has been gradually adjusted to a high-energy core city. We gave the company a 23-year EPS of RMB 1.31, 6-7 times the PE valuation. The corresponding market value range was HK$123-14.3 billion, and the corresponding reasonable value range was HK$8.55-9.98 per share. (Not specified in this article; all prices are in RMB, 1 HKD = RMB 0.9156) Risk Warning: Market recovery falls short of expectations.