It has a strong state-owned enterprise background and a low base. Poly Real Estate is a Hong Kong-listed real estate platform under China Poly Group and Poly Development (600048 CH, superior to major markets). The company's business is mainly distributed in more than 30 high-energy cities in mainland China and overseas cities. On June 30, 2023, the company had 18.4 million square meters of total soil storage. About 26% and 22% of land reserves are distributed in the Yangtze River Delta and Greater Bay Area. We estimate that the company has saleable resources of 275 billion yuan, which can cover 3-4 years of contract sales. The company recorded a 31% increase in contract sales in the first ten months of 2023 to 48.6 billion yuan, ranking 25th. It is also one of the housing enterprises with the highest growth rate. The company maintained an active investment strategy. The total amount of land acquired in the first ten months was about 40% of contract sales, and the total amount of newly acquired saleable resources ranked 15th.

Solid fundamentals. We expect a compound growth rate of 7% in Poly Realty's profit for the 2021-2025F, mainly due to the increase in its contract sales. We think there is room for a correction in gross margin of about 20%, but at the same time, the tax rate will also drop. The net debt ratio dropped sharply from 115.9% in 2022 to 97.3% in June 2023. As share capital continues to grow, we expect the net debt ratio to drop to around 80% in 2025. Good liquidity is one of the highlights of Poly Real Estate. Short-term debt as a share of total debt fell from 32.5% in 2020 to 22.5% in June 2023; at the same time, the short-term cash debt ratio increased from 1.53x in 2020 to 1.95x in June 2023. The company has only one $550 million debt due in November 2025. The company was also granted a domestic debt quota of 15 billion yuan.

Cheap buying opportunity. Poly Real Estate has the longest listing history among small and medium capitalization stocks of state-owned enterprises, but its valuation is the lowest (market account ratio 0.2x compared to 0.2-0.8x of peers). We blame it on its unclear development strategy prior to the 2017 Poly Development restructuring. The company established a new management team in 2021, and the company's strategy has stabilized since then. We believe that under the opportunities of market decline and market consolidation that began in 2021, Poly Real Estate became a cheap target for purchases. We give an initial coverage rating that is superior to the market. We gave it an initial rating as a buy, and the target price was HK$2.50 based on a 75% NAV discount. Major risks include continued market downturn, declining gross margin, management team turnover and group restructuring, and insufficient management execution.