Description of the event

In the first three quarters, the company achieved revenue of 20.7 billion yuan (-16.7%), net profit of 50 million yuan (profit for the same period last year), net profit of 570 million yuan after deducting non-return net profit of 570 million yuan (profit of 42.33 million yuan for the same period last year), and a comprehensive gross profit ratio of 27.2% (-0.6 pct).

Incident comments

The decline in settlement resources led to a year-on-year decline in revenue, and the decline in gross margin and impairment dragged down the parent's performance. The company achieved revenue of 20.7 billion yuan (-16.7%) in the first three quarters of this year. The decline in revenue was mainly due to a decline in settlement revenue from development business. Net profit was a loss of 500 million yuan (profit of 90.65 million yuan for the same period last year), mainly due to a year-on-year decline in composite gross margin of 0.6 pct to 27.2%, accrued impairment of 620 million yuan (asset impairment of 580 million yuan, credit impairment of 0.4 billion yuan). Furthermore, the year-on-year increase in the period expense ratio of 3.7 pct to 17.0% also dragged down performance to a certain extent. Although taxes and surcharges fell by 1.6pct to 3.2% year on year, and investment income for joint ventures of $0.9 billion (loss of $120 million in the same period last year), it is still difficult to withstand the decline in gross margin and the adverse effects of impairment on performance. As of 2023Q3, the company had pre-collected accounts of 37.29 billion yuan (+0.5%), and advance receiving/2022 settlement revenue = 1.1X, maintaining a relatively stable outlook on post-settlement revenue.

Sales investment continues to decline, and sufficient land reserves can provide some support for subsequent sales. The company's sales volume increased in the first three quarters of this year, achieving sales volume of 38.8 billion yuan (+3.8%), sales area of 1.16 million square meters (-11.3%), and average sales price of 24,000 yuan/square meter (+17.1%) (sales data from Corey). The average price increase may be due to an increase in the city's energy level due to sales layout. In the first three quarters, the company acquired 3 new projects, located in Nanjing, Xi'an, and Shanghai, with land acquisition of 168,000 square meters (-59.0%), land acquisition amount of 3.14 billion yuan (-59.1%), and average land acquisition price of 18,700 yuan/square meter (-0.4%); land acquisition intensity in terms of amount and area was 8.1% and 10.5% respectively. In an environment where sales continued to be sluggish and capital chain margins were tightening, the company strictly invested in expansion, and was prudent in land acquisition. As of 2023H, the saleable land storage value of the company is about 166.6 billion yuan, and the saleable cycle is over 3 years. Once the marginal market improves, sufficient land reserves effectively guarantee the increase in later sales scale.

Interest-bearing debt has increased slightly, and short-term cash debt has a higher margin than the guarantee ratio. As of 2023Q3, the company's interest-bearing debt was 77.81 billion yuan (+5.6%), and the scale of interest-bearing debt increased slightly. The short-term cash to debt ratio (not excluding restricted funds) = 1.95X (+0.65X), the net debt ratio is 104.4% (+10.6pct), and the balance ratio excluding pre-received balance ratio is 72.1% (+1.0pct).

Investment advice: Declining profitability and impairment are dragging down performance, and waiting for future value recovery. In 2023, the company's primary goal was to create value and profit, making every effort to reverse losses and increase profits. The company responds to the call, revitalizes assets, actively transfers self-owned properties in core areas of core cities such as Shanghai and Beijing, and continues to pay attention to the company's future value restoration. It is predicted that the company's net profit for 2023-2025 will be 2.8/48/62 million, and the 2024-2025 performance growth rate will be 72.6% and 29.1%. The corresponding P/B will be 0.95/0.92/0.89X, giving it an “increase in holdings” rating.

Risk warning

1. Market sales continued to be weak, and the company's sales and cash flow payments fell short of expectations; 2. Gross margin declined, and inventory impairment dragged down performance.