2023 results are in line with market expectations

Greentown Management announced its 2023 results: operating revenue increased 24% year over year to 3.3 billion yuan, and net profit to mother increased 31% year over year to 970 million yuan, in line with market expectations. The board of directors recommended a dividend of 0.5 yuan per share (including a special dividend of 0.1 yuan). The dividend ratio remained above 100% for two consecutive years, corresponding to the current dividend rate of 9.5%.

Commercial agency construction drives rapid revenue growth. In 2023, the company achieved revenue of 23.5 billion yuan, 7.9 billion yuan, and 170 million yuan, respectively, with year-on-year changes of +41%, +1% and -18%, respectively. Among them, the rapid increase in commercial construction revenue was mainly due to the steady expansion of Xintuo's construction scale, internal management optimization, and an increase in project start-up conversion rates. The main reason for the stable scale of government construction revenue was mainly due to the company optimizing its business layout and business model, and actively abandoning some low-profit margin projects.

The scale of active contracts is growing steadily, and it is expected that they will continue to expand in the future. The estimated construction cost for the company's new projects in 2023 was 10.37 billion yuan, an increase of 20% over the previous year; the total construction area of the contract increased 18% year over year to 120 million square meters, of which the government, state-owned enterprises and financial institutions accounted for 69% and 68% of the new contract area respectively, which is basically in line with the same period last year. Currently, the company's development is still in the dividend stage. We believe that the company is expected to continue to benefit from the release of proxy construction needs from urban investment and financial institutions, and government construction business requirements related to guaranteed housing, and the signing of new orders is expected to maintain a certain level of growth in the future.

Comprehensive gross margin remained flat, and operating cash flow performance was stable. The company's comprehensive gross margin in 2023 was 52.2%, which is basically the same as in 2022. Among them, the gross margin of commercial contract construction decreased by 1.5 percentage points year on year, mainly due to factors such as an increase in the share of state-owned enterprises and financial institutions, and an increase in costs after the company expanded the scope of customer services (architectural design, marketing, etc.); the gross margin of government contract construction increased 4.4 percentage points year on year, mainly due to improvements in project management and labor efficiency. The company achieved net operating cash flow of 960 million yuan throughout the year, and the operating cash flow coverage ratio of net profit continued to be around 1.0 times.

Development trends

Steady growth and high dividends are expected to continue in the future. Currently, the company has plenty of orders (new orders signed in 2023/operating income reached 3.1 times). We expect that the company will continue to benefit from the expansion of proxy construction demand brought about by state-owned enterprise urban investment, financial institution projects, and the continuous promotion of the “three major projects”. There is still strong certainty about the company's future revenue and profit growth. The company's dividend guideline ratio is not less than 80%, and the dividend payout ratio in 2022 and 23 is over 100%. We expect that with stable operating cash flow performance, we expect to continue to maintain a high dividend level in the future.

Profit forecasting and valuation

We have basically kept our profit forecast unchanged. We expect the company's net profit for 2024 and 2025 to be $1.54 billion and $1.54 billion, respectively, up 27% and 25% year-on-year. Maintaining an outperforming industry rating and a target price of HK$7.4 (corresponding to 11 times the 2024 price-earnings ratio, implying 30% upside), the company is currently trading 8.3 times the 2024 price-earnings ratio and the current dividend yield of 9.5%.

risks

The competitive landscape of the industry worsened beyond expectations, putting pressure on the scale of innovation and profit margins; the recovery in the commercial residential sales market was slower than expected.