Profitability is predicted to fall 15% year over year, which is basically in line with market expectations
We expect the company's revenue to increase 15% year over year to 83.3 billion yuan in 2023, gross margin down 4.4 percentage points year on year to 16.0% year on year (taking into account inventory impairment), and core net profit to mother fall 15% year on year to 3.61 billion yuan. We anticipate that the company may still maintain its previous dividend policy and pay a full year dividend of 40% of the core net profit attributable to the mother, corresponding to the current dividend yield of 9.1%.
The 2023 sales target was exceeded, leading the industry in growth rate. The company's sales in 2023 increased 14% year over year to 142.5 billion yuan (the annual sales target set in early 2023 was 132 billion yuan), and Kerry ranked 4th to 12th in terms of total sales volume, leading the comparable industry we cover (covering central state-owned enterprises with an average of +2% YoY). We believe that the company's impressive sales performance is mainly due to abundant supply and high quality (the company estimates that sales in the Greater Bay Area, mainly Guangzhou, contributed about 50%, and the East China region nearly 30%), and the removal rate is highly resilient (we estimate that the total supply removal rate for the whole year is about 55%).
The financial side has outstanding advantages, and more growth strengthens resource endowments. The company acquired a total of 24 parcels of land in 2023, with a total land acquisition intensity of 42%, and an additional value of more than 100 billion yuan, which is over 80% in terms of the value of the goods combined. Looking at the newly acquired projects: 1) The open market contributed 65% in terms of construction. Other land acquisition methods include TOD/Gaodi/state-owned enterprise cooperation/urban renewal; 2) they are all located in ultra-high/high-energy cities, and all are first-tier and provincial capitals except Qingdao, accounting for 74% of the land acquisition amount; 3) The average net profit margin of the project is about 10%, and the average IRR is about 24%. We estimate that the company's leverage level until the end of 2023 was generally stable compared to the end of 1H23 (net debt ratio/withheld debt ratio of 53.2%/66.8% at the end of 1H23). Considering the low cost of new financing in 2H23 (the weighted average interest rate of 3.37% on public development bonds), we estimate that the average financing cost of the company at the end of 2023 is expected to decline marginally by 3.98% compared to the end of 1H23.
Key points of interest
Adequate soil storage and comprehensive incentive mechanisms will support sales performance to continue leading the industry in 2024. We estimate that the company's current unsold goods are worth about 450 billion yuan, can support development for about 3 years, and focus on ultra-high/high-energy cities in key urban agglomerations such as the Greater Bay Area and Yangtze River Delta (we estimate that the current core 17 cities account for about 90% of the unsold value); in addition, we expect the company's land acquisition intensity in 2024 to be similar to 2023, and will maintain an equity investment of 40 to 50 billion yuan to actively supplement high-quality soil storage. Combined with the company's market-based assessment and incentive mechanism, and the core management shareholding plan binds the interests of executives and minority shareholders, we expect the company's sales amount to maintain a steady increase in 2024.
Profit forecasting and valuation
Based on adjustments in the pace of settlement and weak industry fundamentals to suppress profit margins, the 2023/2024 profit forecast was lowered by 17%/24% to 36.1/3.66 billion yuan, -15%/+1% year over year, and a profit forecast of 3.85 billion yuan for 2025 was introduced, +5% year over year. Maintaining an outperforming industry rating, the target price was lowered by 32% to HK$7.88 (7.5/7.0 times 2024-25 P/E and 63% upside) based on profit forecast adjustments and declining investor sentiment. The company is currently trading 4.6/4.3 times 2024-25 P/E.
risks
Industry fundamentals have declined beyond expectations; profit margins on new land storage have fallen short of expectations.