Abstract: Poly Development announced its 2023 annual report. The company achieved total operating revenue of 346.89 billion yuan, an increase of 23.4% year on year; net profit to mother was 12.07 billion yuan, down 34.1% year on year. The company plans to pay a cash dividend of 4.1 yuan (tax included) for every 10 shares, with a dividend rate of 42.4%.

The company's settlement scale is growing steadily; the company's performance is under pressure due to the decline in gross margin level, the scale of return on investment, and the increase in impairment preparations. In 2023, the company's revenue increased 23.4% year on year. The company's completion and carry-over scale led to revenue growth. The settlement area of real estate projects in 2023 was 24.822 million square meters, up 12.9% year on year; net profit to mother fell 34.1% year on year, mainly because low-profit projects in the early stages became the main carry-over force, leading to a decline in gross margin level, a decrease in the scale of investment income, and an increase in preparation for depreciation of accrued assets. 1) In 2023, the company's gross profit margin, net profit margin, and net interest rate due to mother were 16.0%, 5.2%, and 3.5%, respectively, down 6.0, 4.5, and 3.0 percentage points year-on-year, respectively. ROE also fell 3.2 percentage points to 6.1% year on year due to declining profit margins. 2) The company's investment income in 2023 was 2.21 billion yuan, a year-on-year decrease of 47.3%.

3) Based on current market conditions and due to prudential principles, the company accrued an impairment value of 5.05 billion yuan on inventory and long-term equity investments, an increase of 3.89 billion yuan over the previous year. However, with industry profit margins generally declining, the company's performance is in line with industry trends. The company continues to improve quality and efficiency and strictly control expenses. The company's sales expenses were 8.88 billion yuan, up 17.9% year on year; management expenses were 5.16 billion yuan, up 8.8% year on year; financial expenses were 4.39 billion yuan, up 19.1% year on year; and the 2023 three-year rate fell 0.4 percentage points to 5.3% year on year. The degree of guarantee of the company's future performance is still high. At the end of 2023, the company's advance accounts were 378 billion yuan, a year-on-year decrease of 8.4%, and the advance account/operating income was still as high as 1.35X.

Capital market performance continued to be sluggish in 2023. The company effectively protected investors' rights and interests, implemented repurchase plans, and promoted the majority shareholders' holdings. 1) Dividends: The company revised the “2023-2025 Shareholder Return Plan” to increase the share of 2023-2025 cash dividends to no less than 40% of net profit returned to mother for the year. 2) Increase in holdings: Based on confidence in the company's future development and recognition of long-term investment value, the actual controller, Poly Group, plans to increase its holdings of the company's shares through centralized bidding transactions within 12 months from December 12, 2023, with a total increase of 250 to 500 million yuan. As of March 6, 2024, Poly Group has increased its holdings of the company's shares by 26.7.08 million shares, accounting for 0.22% of the company's total share capital. The cumulative increase amount of 250 million yuan has reached the lower limit of the planned holdings increase. 3) Repurchase: On December 13, 2023, the company plans to repurchase the company's shares no more than 2 billion yuan and not less than 1 billion yuan. As of March 7, 2024, the repurchase period of the company expires, and the company has repurchased 105 million shares, accounting for 0.88% of the company's total share capital. The average repurchase price is 9.53 yuan/share, and the total payment capital is 1.0 billion yuan. It has reached the lower limit of the plan amount of the repurchase plan.

The balance and liability structure continues to be optimized, financing costs are continuously reduced, and financing channels are unobstructed. At the end of 2023, the company's interest-bearing debt was 354.3 billion yuan, down 7.1% year on year, financing costs were 3.56%, down 36 BP year on year, and debt maturing within one year was 73.7 billion yuan, accounting for 20.8%, down 0.5 percentage points year on year. The company's direct financing accounted for 16.3%, and there is still plenty of room for improvement. Additional financing of $137.1 billion was added in 2023, with financing costs of 3.14%, of which the three-year direct financing cost was as low as 3.0%. By the end of 2023, the company's balance ratio after excluding advance payments was 68.2%, down 1.4 percentage points from the previous year, and the net debt ratio was 61.2%, down 2.4 percentage points from the previous year. The short-term cash debt ratio was 2.01X, and it was always in the green position. From January to January 2024, the company successfully issued 20.8 billion yuan of open market bonds, including 5 billion yuan of short-term financing notes, 6.9 billion yuan of winning notes, 5.4 billion yuan of corporate bonds, and 3.5 billion yuan of ABS.

The company focuses on open source and savings, and continues to strengthen operating cash flow management. By the end of 2023, the company held 148 billion yuan in cash, a year-on-year decrease of 16.2%. In 2023, the company achieved a net cash flow of 13.9 billion yuan from operating activities, an increase of 87.7% over the previous year, on the basis of actively opening up resources and saving resources, maintaining steady development of production and operation, and a reasonable increase in investment and expansion amounts, which was positive for 6 consecutive years. The company is actively speeding up returns, revitalizing restricted capital, and strengthening the recovery of mortgages and housing payments to be collected. The annual return amount was 434 billion yuan, and the sales return rate was 102%. Among them, the sales return rate for the year was 78.3%, an increase of 11.2 percentage points over the previous year. At the end of 2023, the company sold a total of 96.6 billion yuan in capital to be returned, and there is plenty of capital to be used in the future. The company has increased its usable capital by a total of 52.9 billion yuan by speeding up investment recovery in shareholding projects, revitalizing pre-sale supervision funds through various methods, and speeding up tax refunds.

Sales rank first in the industry. In 2023, the company achieved sales volume of 422.2 billion yuan, a year-on-year decrease of 7.7%, ranking first in the industry; achieved a sales area of 23.86 million square meters, a year-on-year decrease of 13.2%. The results of deep urban cultivation continue to be prominent. The company contributed nearly 90% of sales in 38 core cities with strong certainty, an increase of 2 percentage points over the previous year. Sales contributions from the Pearl River Delta and Yangtze River Delta exceeded 110 billion yuan and 140 billion yuan respectively, including Guangzhou and Foshan totaling more than 80 billion yuan and Shanghai over 50 billion yuan, with remarkable results. Market share continues to increase. The company's market share in 2023 was 3.6%, an increase of 0.2 percentage points over the previous year. Among them, the share of 38 core cities reached 6.8%, an increase of 0.7 percentage points over the previous year; there were 27 cities with a market share of more than 10%, and the share of single cities continued to break through and increase. Remarkable results have been achieved in eliminating existing projects. The company stepped up efforts to eliminate stock projects obtained before 2022. The contract amount for the stock project was 257.5 billion yuan, accounting for 61% of the annual sales amount, and the sales area was 16.43 million square meters, accounting for 69% of the annual sales area.

From January to January 2024, the company's sales area was 3.669 million square meters, a year-on-year decrease of 41.8%; the sales amount was 62.98 billion yuan, a year-on-year decrease of 44.8%. Although the sales scale has shrunk markedly, Kerry ranked first in the industry in terms of full-caliber sales amount.

Focus on core cities to achieve high-quality expansion, and continue to optimize the soil storage structure. 103 new projects were added in 2023, with a total land price of 163.2 billion yuan, up 1.2% year on year; land acquisition intensity (land acquisition amount/sales amount) was 38.7%, up 3.4 percentage points year on year; equity land price was 135.9 billion yuan, up 26% year on year; and land acquisition equity ratio increased 16 percentage points to 83%. The average profit margin on the company's new project costs before tax is above 15%, and future profitability can be expected. Keep focusing on core cities. Of the company's expansion amount in 2023, 99% was located in the core 38 cities. The average floor price of the new projects was 15,187 yuan/square meter, down 0.8% from the previous year. High-quality expansion guarantees development efficiency and removal speed. 40% of the newly acquired projects in 2023 opened and contributed more than 30 billion dollars. The average initial opening time was 5.2 months, and the initial efficiency increased by 3.7 months; the 2022 newly acquired projects recovered all shareholder investment during the year. By the end of 2023, the company's land reserves were 77.9 million square meters, including 66.08 million square meters of stock projects and 11.82 million square meters of incremental projects. The share of stock projects decreased by 8 percentage points; the core 38 urban area reserves accounted for nearly 70%, an increase of 2.4 percentage points, and the resource structure was continuously optimized.

From January to January 2024, the company acquired a total of 4 land projects in the three second-tier cities of Tianjin, Xi'an and Taiyuan, with a total construction area of 592,000 square meters, a year-on-year increase of 35.4%; the land acquisition amount was 5.03 billion yuan, a year-on-year decrease of 72.8%; the land acquisition amount was 4.67 billion yuan, and the land acquisition equity ratio was 92.9%, and the land acquisition equity ratio continued to rise. In 2023, the company started a new construction area of 14.91 million square meters, a year-on-year decrease of 37.2%; concentrated resources to guarantee quality delivery. The completed area was 40.53 million square meters, an increase of 2% over the previous year, and completed the quality delivery of 2.91 million sets, an increase of 12% over the previous year. In 2024, the company plans to complete direct investment of 335 billion yuan in real estate and related industries. It plans to start 18 million square meters of new construction, an increase of 20.7% over the previous year, and plans to complete 34 million square meters, a decrease of 16.1% over the previous year.

The scale of diversified businesses continues to expand and achieve collaboration. 1) Poly Industries: By the end of 2023, the area under management reached 720 million square meters and the contract area reached 920 million square meters, an increase of 19.5% over the previous year. There were 3069 contract management projects, and the scale reached another level. Among them, the proportion of contract area for external development projects increased 3.5 percentage points to 62.9% year on year. In 2023, Poly Property achieved operating income of 15.06 billion yuan and net profit of 1.40 billion yuan to mother, up 10.0% and 23.3% year-on-year respectively. 2) Focus on asset returns and comprehensively improve the level of asset management. In 2023, the company consolidated resources for key business formats such as apartments, office buildings, and commerce, and effectively improved the operating quality of assets. The return on assets already opened was 2.7%, an increase of 0.5 percentage points over the previous year; at the same time, it also carried out key aspects of commercial asset operations such as positioning, planning, operation, financing and exit. At the end of the year, the company added 28 to 135 commercial asset projects such as hotels, shopping centers, office buildings, and apartments. The management area reached 4.35 million square meters, an increase of 12% over the previous year. Thanks to the double increase in return on assets and operating scale, the company achieved asset management revenue of 4.17 billion yuan in 2023, an increase of more than 30% over the previous year.

Investment recommendations and profit forecasts:

We believe that with its strong resource moat and the financing advantages of central enterprises, all kinds of capital and land resources have gathered at the company. As a state-owned enterprise with good land acquisition and sales fundamentals, the leading position in the industry will be further consolidated, and at the same time, it will continue to benefit from easing policies and industry pattern optimization. We expect the company's revenue for 2024-2026 to be 3435/3379 billion yuan, respectively, with year-on-year growth rates of -1%/-2%/2%; net profit to mother of 107/111/12.2 billion yuan, respectively, with year-on-year growth rates of -11%/4%/10%; corresponding EPS of 0.90/0.93/1.02 yuan, respectively. The PE corresponding to the current stock price is 8.9X/8.6X/7.8X, respectively. Considering that the company's financing is relatively smooth, the sales scale still ranks first in the industry, and it is a safe and stable state-owned enterprise, we still maintain our purchase rating.

The main risks faced by ratings:

Sales and settlement fell short of expectations; real estate regulation was tightened beyond expectations; financing was tightened; diversified business development fell short of expectations.