The company's recent situation
The company recently attended the 2023 Investment Strategy Conference held by CICC, during which time it had in-depth exchanges with investors on the company's current business situation.
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Taking into account both liquidity and profitability, the focus is on active land replenishment in core cities, and the quality of land stocks is enhanced. The China Index shows that the company acquired a total of 72 lots of land in January-October, with an average equity ratio of 71% and land acquisition intensity of 74%.
Since the beginning of the year, the company has added a total saleable value of about 200 billion yuan, of which Hangzhou, Shanghai, Suzhou, Beijing and Xiamen together account for more than half, and ultra-high/high-energy cities account for about 80%. In addition, the company also upholds a deep-rooted mindset to make opportunistic land reserves in highly competitive markets such as Taizhou, Zhangzhou, and Longyan. We estimate that the company's average net profit margin at the new plot project level from year to date is 7-8%, which is similar to the 2022 land acquisition estimate. Thanks to efficient inventory removal and active replenishment of high-quality land storage, the company's current unsold value has increased by about 8% over the medium term to 300 billion yuan, and the corresponding sales coverage ratio is about 1.5 times. Looking at the structure, the share of Tier 1 and 2 cities in the unsold value as of the end of 1H23 increased to 74%, and completed inventory accounted for less than 3% of the overall inventory. Land acquisition since 2022 has contributed about 70% of the current unsold value.
High quality soil storage strengthens product strength to support efficient removal, and annual sales are expected to exceed 180 billion yuan. The company's equity sales in January-September increased 37% year on year to 101.3 billion yuan. Kerri showed that the total sales volume of C&D real estate in January-October increased 21% year on year to 145.6 billion yuan. Looking ahead, we expect the company to increase supply by 70-80 billion yuan in the fourth quarter, mainly from late November to December (only about 9 billion yuan in additional supply in October). In addition to the rollover over 70 billion yuan at the end of the third quarter, the overall saleable value is quite abundant. With this support, we expect the company's total annual sales volume to exceed 180 billion yuan (180 billion yuan corresponds to a sales growth rate of 6%, implying an overall removal rate of about 32% in the fourth quarter. If we do not consider rollover removal, it is implied that the removal rate of new supplies added in November-December is about 52%, compared with the removal rate of 79% for the company's first project in January-September).
Benefiting from the state-owned capital background, the financial side has outstanding advantages. The company's net debt ratio and withheld debt ratio at the end of 1H23 decreased by 21/1.9ppt to 32.0%/61.4%, respectively, compared to the end of 2022, and the short-term cash loan ratio increased 6.5 times.
Despite the company's active land acquisition, thanks to efficient repayment (1H23 cumulative repayment rate of 104%), we expect the three red line indicators to be generally stable until the end of the year. Thanks to prudent financial management and excellent debt structure (bank loans accounted for 40% at the end of 1H23 and 55% of majority shareholder loans), the average interest rate of the company's new bank loans in the first half of the year was 2.3%, driving the average financing cost at the end of 1H23 to a historical low of 3.97% from the end of 2022. We believe the company is expected to continue to maintain its cost advantage on the financing side.
Profit forecasting and valuation
Maintaining the 2023-24 profit forecast, outperforming industry ratings and target price of HK$27.86, corresponding to 9.6/7.0 times the 2023-24 price-earnings ratio and 55% upward space. The company is currently trading 6.2/4.5 times the 2023-24 price-earnings ratio.
risks
The recovery in industry prosperity fell short of expectations; the profit margin of additional land storage fell short of expectations.