Despite the adverse market condition in 2023, Yuexiu still exceeded its contracted sales target set at the beginning of the year. Factoring in the company's stronger contracted sales growth, we lifted our 2023E revenue by 2.4%. On the other hand, the decline of property price in 2023 exceeded our expectation, considering which, we lowered our 2023E gross margin by 1.8ppts from 17.8% to 15.9%. As a result, we cut our 2023E core net income by 14.4% to RMB3.67bn, representing a 13.5% YoY decline. We also cut our TP by 14.3% to HK$9.85. Thanks to its stronger contracted sales, we expect financial position to remain solid, with net gearing at below 70%, which continues to support Yuexiu's active landbanking. As such, we believe Yuexiu will continue to deliver leading growth ahead, and see the 0.3x 2023E P/B as undemanding. Maintain BUY rating on the stock.

Key Factors for Rating

Despite impact from the deeper-than-expected correction in property market during 2H23, Yuexiu still managed to achieve RMB142bn contracted sales in 2023, representing 13.6% YoY growth, outperforming almost all peers. The contracted sales number also exceeded RMB132bn, which the management targeted at the beginning of the year.

Going forward, we expect Yuexiu to continue outpacing peers, supported the company's active landbanking. While Yuexiu ranked 12th among peers in terms of contracted sales in 2023, the company ranked 10th in terms of land spending according to CRIC. This implies that the company's ranking in terms of contracted sales is likely to further improve in the future. We calculated that Yuexiu's total land spending in 2023 amounted to RMB59.7bn, which equals to 42% of its contracted sales. Attributable land spending amounted to RMB35.0bn.

We expect 2023E financial position of the company to remain solid, thanks to its relatively strong contracted sales. We estimate net gearing to remain below 70%, and expect the company to continue meeting the criteria of the green category under "three red lines". We estimate short-term debt to be 10-15% of total debt, and average financing cost to remain at a low level of 3.8-3.9%.

Key Risks for Rating

Property market recovery may be slower than expected

Valuation

We cut our estimated NAV by 14.3% to HK$12.31, factoring lower gross margin. The stock currently trades at 0.3x 2023E P/B and 66% discount to NAV, which we see as undemanding, given the company's industry leading contracted sales growth, and solid financial position.