Description of the event

The company announced that the first three quarters of 2023 had revenue of 52.3 billion yuan (-1.5%), net profit of 58.02 million yuan (-98.3%), net profit of 58.02 million yuan (-98.3%), net profit of non-retracted net profit of 75.99 million yuan (profit of 3.12 billion yuan for the same period last year), and a comprehensive gross profit margin of 17.0% (-3.5pct).

Incident comments

Gross margin and investment returns have declined, and substantial impairment has dragged down performance. Gross margin and investment returns have declined, and substantial impairment has dragged down performance. The company's revenue for the first three quarters of 2023 was 52.3 billion yuan (-1.5%), while net profit was only 58.02 million yuan (-98.3%), mainly due to a decrease of 3.5 pct to 17.0% in consolidated gross margin, and investment income in joint ventures fell 97.5% to 0.6 billion yuan year on year; in addition, significant impairment dragged down performance, with impairment of 1.46 billion yuan in the first three quarters (loss of 0.3 billion yuan in the same period last year), of which inventory and credit impairment were 8.70 billion yuan and 590 million yuan, respectively. The weak sales market is compounded by the severe financing environment. The company's sales rate and financial rate increased slightly, leading to a year-on-year increase in the period fee rate of 0.4 pct to 10.3%. Although taxes and surcharges fell 2.5pct to 1.7% year on year, and income from changes in fair value increased 1365% year over year to $320 million, it is still difficult to withstand the adverse effects of declining profitability and impairment on performance. As of 2023Q3, advance payments on the company's accounts were $93.24 billion (-23.4%), and advance payments/2022 settlement revenue = 0.85X, which guarantees a certain amount of post-settlement income.

Sales declined year over year, and investment tended to be prudent. In the first three quarters of 2023, the company had sales of 121.9 billion yuan (-25.2%), a sales area of 6.69 million square meters (-5.2%), and an average sales price of 18,000 yuan/square meter (-21.1%), ranking 11th in the industry. From a land acquisition perspective, in the first three quarters of 2023, the company won projects in high-energy cities such as Shanghai, Hangzhou, Dongguan, and Xi'an. The full-caliber land acquisition amount was 12.5 billion yuan (-43.2%), the land acquisition area was 950,000 square meters (-44.4%), and the floor price was 13,158 yuan/square meter (+2.3%). The increase in floor price is related to focusing on the layout of high-energy cities. The intensity of land acquisition in terms of value and area in the first three quarters was 10.3% and 14.2%, respectively. Affected by declining sales sentiment and tightening capital chains, the company adheres to the principle of “quantity in and out” and tends to invest in land acquisition prudence. As of 2023H, the company has not settled 48.78 million square meters of land reserves (equity ratio 45.0%). If the market recovers, in-hand land storage is still expected to guarantee that the company will maintain a certain sales scale. In mid-2023, the company raised the number of new construction and completion plans for the full year of 2023 to 435, 13.53 million square meters (-16.7%, -4.6%). The company's new construction in the first three quarters of 2023 fell 46.4% year on year to 2.24 million square meters (accounting for 51% of the annual plan), and completion fell 6.3% year on year to 6.86 million square meters (accounting for 51% of the annual plan). Sales did not improve, and the company's willingness to start new construction was not strong.

The scale of interest-bearing debt continues to decline, and reducing leverage is currently the main trend. At the end of 2023Q3, the company had interest-bearing debt of 102.76 billion (-13.6%), net debt ratio of 60.2%, excluding pre-collected balance ratio of 63.8%. Reducing leverage is the company's main trend at present.

Investment advice: Due to insufficient momentum for market sales recovery, trending credit contraction in the industry, tightening the margins of the company's capital chain, and the business orientation is becoming more cautious. However, as a high-quality and established housing enterprise in the industry, the company's relatively outstanding operating efficiency and resource endowment are still there. Under the current severe environment, the company is pressuring its liabilities and is focusing on repayment. Once market demand stabilizes, the tight capital chain situation is expected to ease marginally, and the management level will also improve marginally accordingly. Net profit for 2023-2025 is expected to return to the mother of 4.51/48.6/5.04 billion, with a growth rate of -26.2%/+7.9%/+3.8%. The corresponding PE is 5.2/4.8/4.6X, respectively, maintaining the “buy” rating.

Risk warning

1. Market sales continued to be weak, and the company's sales and cash flow repayment fell short of expectations; 2. Investment income declined, and impairment losses were calculated.