Report summary:
Land reserves are abundant and concentrated in high-energy cities. As of the end of June 2023, the company's land reserves were 28.35 million square meters, with a sales area of 770,000 square meters for the full year of 2023, covering 37 times; land storage in the residential sector was distributed in high-energy cities in the Bohai Rim, Yangtze River Delta and Pearl River Delta regions, and 95% of the commercial sector's land storage rights were concentrated in first-tier cities; according to Kerui, the company's land storage rights at the end of 2022 were 467.2 billion yuan, ranking 12th in the total land storage value of Chinese real estate companies.
Highly self-disciplined, with a sound financial structure. The company's debt structure is dominated by long-term loans. At the end of June 2023, long-term debt accounted for 68.1%, with banks as the main source of financing, 84% of interest-bearing debt as banks, and credit bonds accounting for only 4.6%; comprehensive financing costs were 6.3%, maintaining a reasonable level; net repayment of interest-bearing debt of HK$18.7 billion and HK$5.1 billion respectively in 2022 and January-June 2023.
“Hong Kong-style” domestic capital has been deeply involved in old reform for many years, and slow turnover has reaped high premiums. From January to December 2023, the company achieved sales of 32.6 billion yuan; under the development strategy of focusing on high-end housing, adhering to high-energy cities, and slow turnover, the average sales price for January-December 2023 was 42,100/㎡. Apart from settlement affected by the epidemic in 2022, the net interest rates of the real estate development sector in 2019-2021 were 35%, 42%, and 51% respectively; by the end of 2022, the company expects the value of projects incubated through old transformation to reach 252 billion yuan.
Lay out the core city and build a moat for the commercial sector with ingenious operation. The commercial sector uses “Hesheng Hui” as the core IP. The light and heavy model has gone hand in hand. It has built and operated more than 5 million square meters, and more than 80% of the projects are distributed in first-tier cities in the north, including commercial complexes, offices, hotels and industrial complexes; by the end of 2022, the company had 16 self-owned projects, with a total construction area of 2,0492,000 square meters.
Investment suggestions: The company has gone through the dark days of real estate with a highly self-regulatory financial structure; at the end of 2022, the equity and land reserves were 467.2 billion yuan, ranking 12th in the overall market; under the condition of ensuring liquidity, reaping old land and deepening high-energy cities, reaping high premiums with slow turnover; the commercial sector has formed a core IP and has a brand moat. We forecast that the company's net profit for 2023-2025 will be HK$76.71/80.78/HK$8.293 billion, with earnings per share of HK$2.02/2.13/2.19, and corresponding PE of 1.96/1.86/1.82X. With the company mastering high-quality land storage, focusing on high-end housing, and continuing to vigorously develop the commercial sector, we have given the company a reasonable target price of HK$4.79, corresponding to 2.25 times the 2024 PE valuation, considering the slow turnover business model of Hesheng Creative Development Group itself. First coverage, giving the company a “buy” rating.
Risk warning: The industry is recovering slowly; the progress of old transformation and incubation falls short of expectations; the financing environment deteriorates; performance forecasts and valuations fall short of expectations.