FY23: Affected by the downturn in the real estate industry, performance declined; maintaining the “buying” company's FY23 performance: revenue -2% YoY to $56.4 billion; overall gross margin -3.2pct YoY to 11.2%; net profit to mother -27% YoY to $2.3 billion. Overall performance declined, mainly dragged down by the downturn in the real estate industry. Considering the impact of the downturn in the real estate market on the development business, we adjusted our revenue and gross margin assumptions to adjust the company's 2024-26E EPS to 0.65/0.72/0.76 yuan (24-25E previous value: 0.83/0.93 yuan). Referring to a comparable company's 2024E PE valuation of 3.8 times (Wind agrees), and considering that the company's land storage is mainly located in third- and fourth-tier cities, we believe that the company's 2024E reasonable PE valuation is 3.4 times, adjusted the target price to HK$2.44 (previous value: HK$4.22), and maintain the “buy” rating.
Sales regained growth, and the value of goods remained stable
In 2023, the company's contract sales amount was 42.8 billion yuan, +6% year-on-year, and sales regained growth; the average contract sales price was 12,122 yuan/square meter, +12% year-on-year, and the sales payback rate was over 100%. In 2023, the company's equity contract sales entered 18 local TOP3 cities, the same as in '22. The equity sales ranking entered the industry's TOP30 for the first time, and the market share increased steadily. Without considering new land acquisitions, the company plans to promote 101.6 billion dollars in 2024, compared to -9%. Although there is a decline, considering that the company's land storage structure has been optimized and there is plenty of cash on hand, it may be possible to dynamically replenish stocks according to market conditions. We need to pay attention to marginal changes in the market in the future.
Investment has weakened, and the stock soil storage structure has been optimized
In 2023, the company added 1.84 million square meters of full-caliber land storage surface, -22% over the same period, corresponding to a land price of 9.8 billion yuan, -13% year over year, land acquisition intensity 22.8%, and -5.0 pct year on year, and investment strength decreased. By the end of 23H2, the company had 18.8 million square meters of full-caliber land storage. The coverage ratio corresponding to the 23 year full-caliber sales area was 5.3 times, the corresponding equity ratio was 83%, and the land reserves were relatively abundant. Under adhering to the implementation of the “three mainstream” land acquisition strategy, the company's land storage structure was optimized. As of the end of 23H2, the east/central/west/northeast regions accounted for 55%/28%/15%/2%, respectively. Among them, the share of the eastern and central regions with high removal rates increased by 3 pct compared to the end of 22H2.
The scale of leveraged debt has declined, and the debt structure continues to be optimized
As of the end of 23H2, the company's three red line indicators remained in the green position. The net debt ratio/withheld balance ratio and short cash debt ratio were 46.0%/65.7% /1.5x, respectively, -2.8pct/-3.0pct/-0.1x compared to the previous year. The company's financing channels remained unobstructed. Domestic bonds of 4 billion dollars were successfully added during the year. The term was 3-5 years, and the cost range was 3.05%-3.90%, all lower than the company's average financing cost. However, due to rising interest costs on loans denominated in Hong Kong dollars, the average financing cost of the company was +0.4 pct to 4.6% year-on-year in 23. The company's interest-bearing debt at the end of the period was 43.6 billion yuan, -8% year-on-year, and the share of non-RMB debt was -7.2 pct to 33% year over year, and the debt structure was optimized.
We believe that in the current context where domestic financing channels remain unobstructed and the cost of issuing overseas bonds is high, the company will continue to further optimize its debt structure by issuing additional domestic bonds to replace overseas bonds maturing one after another.
Risk warning: Real estate sales recovery in third- and fourth-tier cities was weaker than expected; profitability fell short of expectations; foreign exchange risk.