Backed by Guangzhou's state-owned assets, the sales scale has been rising steadily. ① The majority shareholder Yuexiu Group holds 43.39% of the shares, and the second shareholder Guangzhou Metro holds 19.9% of the shares. The two shareholders and the company develop collaboratively. ② The company is developing steadily, and the sales scale continues to grow. 1H23 had sales of 83.6 billion yuan, a year-on-year growth rate of +71%. The sales scale ranking rose to 13th place, and the year-on-year growth rate ranked first among the TOP20 housing enterprises. We believe that the company's subsequent sales growth is still sustainable, mainly because: ① sufficient land storage, land storage value covered 5.5 times sales by the end of 2022; ② high quality land storage. As of 2023H1, 93% of the company's land storage was in Tier 1 and 2; ③ Guangzhou Shancheng accounted for more than 40% of the company's sales and total land storage. Currently, Guangzhou has introduced a series of support policies, and the market is gradually recovering.
Land acquisition has a good pace, sufficient intensity, focus on core cities, and diverse channels. In terms of pace, the company expanded moderately during the land acquisition window period from 2H21 (land profit margin improved compared to 1H21), and the profit margin for acquisition projects was excellent. In terms of strength, the company's land acquisition intensity in 2022 was 1.68, 2023H1 land acquisition intensity was 0.88, and the equity land acquisition amount ranking has risen to sixth in the industry. In terms of focus, 100% of the company's new land acquisition in 2022 and 2023H1 is focused on Tier 1 and 2. Outside of the Greater Bay Area, it continues to increase the number of cities with more secure decontamination, such as East China and Beijing.
In terms of channels, a moat for land acquisition has been built through “6+1" multiple storage increases. Since 2020, more than 50% of the new land storage has come from private competition. In the current environment where there is intense competition for core projects in core cities, differentiated land acquisition methods help the company to fully replenish high-quality land storage.
Operations are steady and financial security, financing interest rates have been reduced, and financial expenses have declined. 1H23 The company's three red line indicators have been further optimized, with an estimated balance ratio of 66.8%, a net debt ratio of 53.2%, and a short-term cash debt ratio of 4.2x. The company's good financial structure and state-owned assets background are recognized by the capital market, and the financing channels are unobstructed. In the first half of the year, the company successfully issued 5 credit bonds totaling 5.4 billion yuan domestically; overseas successfully issued 2 free trade zone offshore RMB bonds totaling 3.4 billion yuan. Interest rates for newly issued 1H23 bonds are below 4%, and financing costs have been reduced to 3.98% (down 18 bps from 2022). In May of this year, the company completed the stock offering at a price of HK$0.9 per share, with net proceeds of approximately HK$8.3 billion.
The real estate industry is in a period of policy relaxation. The company's land storage quality is high, the company has strong ability to acquire land and replenish goods in a variety of ways, and sales are expected to continue to grow. We expect the company's net profit to be 4.10 billion yuan, 4.71 billion yuan and 5.65 billion yuan respectively from 2023-2025, with year-on-year growth rates of +3.7%, +14.9%, and +19.8%, respectively. Considering the company's sales growth rate and comparable company valuations, the company was given a PE valuation of 9.0x in 2023, corresponding to a target price of HK$9.80 per share, and a corresponding PE of 7.8x and 6.5x for 2024-2025, respectively. Covered for the first time, giving it a “buy” rating.
Risk warning
The recovery of the Guangzhou market fell short of expectations; supply in core cities was insufficient; and the effectiveness and sustainability of policies fell short of expectations.