Turned a loss into a profit in 23 years and maintained a “buy” rating

The company released its annual report on April 12. In '23, it achieved revenue of 20.36 billion yuan, -17% year-on-year; net profit to mother was 550 million yuan, turning a year-on-year loss into a profit. Considering changes in the company's carry-over pace and structure, we lowered revenue but raised gross profit margin, and reduced investment income for 24 to reflect the impact of stock investment. The estimated EPS for 24-26 was 0.47/0.63/0.68 yuan (value 0.62/0.75 before 24/25). Comparable to a company, the average of 24PE is 10 times. Taking into account the company's core urban resources, profit potential of projects to be carried over, and performance fluctuations brought about by stock investment, we believe that the company's reasonable 24PE is 11 times, and the target price is 5.17 yuan (previous value 9.03 yuan, corresponding 14.6 times 24PE), maintaining a “buy” rating.

Key project carry-over and improved stock earnings drove a loss to a profit. The depreciation of projects outside Beijing limited flexibility by -39% of the company's completed area in '23, leading to -18% year-on-year real estate development revenue. However, net profit to mother turned a loss into a profit mainly because: 1. Tiantanfu entered a carry-over period, driving gross margin of real estate development +7.1pct to 18.3% year over year (with gross margin of +9.7pct to 20.8% year on year in Beijing); 2. Stock assets directly and indirectly held by the company performed significantly better than in '22, driving a year-on-year improvement of 1.68 billion yuan in profit and loss from fair value changes and investment income. However, at the same time, due to adjustments in the real estate market, the company prepared 960 million yuan in inventory impairment for the Qingdao and Tianjin projects (due to abnormal fluctuations in profit and loss for minority shareholders due to cooperative projects), limiting profit flexibility. Thanks to rapid sales growth, the company's net operating cash flow was +57% year-on-year to $13.12 billion, laying the foundation for future expansion.

There are plenty of resources to be carried over. The potential profit from shed reform in Tiantanfu and Linhe Village is considerable. By the end of '23, the company had sold 3,536 million square meters of uncarried over area, and the contract debt was 36.32 billion yuan. Compared with the revenue coverage rate of 178% in '23, the resources to be carried over are sufficient. In particular, I saw that Tiantanfu/Wangtan Xinyuan had a carry-over area of 43/60,000 square meters in January and 23, driving Xingrui Company (Wangtan shed renovation project company) to achieve revenue/net profit of 70.9/40 million yuan, while the uncarried over area at the end of the period was still 22.9/90,000 square meters; 2. The Linhe Village scaffolding project locked in management fees and obtained government approval records. It is expected that carry-over will begin after the government audit is completed. We expect the potential profit volume of these two projects to be significant, which is expected to be an important support for the company to release profits.

Sales outperformed the industry by a large margin and continued to supplement high-quality land in Beijing

In '23, the company achieved full-caliber sales of 42.5 billion yuan, +39% over the same period, outperforming the industry (according to the National Bureau of Statistics, the national commercial housing sales volume was -7%), and continued to rank second in the Beijing Equity Sales Ranking of the Central Index, mainly thanks to the contributions of projects such as Tiantanfu, Xiangshanyue, Xingyu BEIJING, and Guoyu Yanyuan. The amount of land acquired by the company in 23 was 151 billion yuan. Of these, it continued to acquire 2 parcels of land in Beijing, with a total land acquisition price of 11.4 billion yuan, with an equity ratio of 64%. The estimated value of goods was 16.5 billion yuan according to the government's guide price, continuing to supplement the high-quality goods value in the Beijing market.

Risk warning: Beijing regional market risk, risk of shed reform and first-level development projects falling short of expectations, risk of performance fluctuations due to equity investment and minority shareholders' profit and loss ratio.