The 2023 results were slightly lower than market expectations, and the dividend ratio exceeded market expectations. Huafa Co., Ltd. announced 2023 results: revenue increased 19% year on year to 72.1 billion yuan; gross margin before tax fell 2.0ppt to 18.1% year on year; net profit to mother fell 30% year on year to 1.84 billion yuan, lower than market expectations, mainly due to inventory impairment of 1.6 billion yuan (800 million yuan in 2022) and a year-on-year decrease in investment income of 1.3 billion yuan. The company plans to pay a dividend of 0.37 yuan per share in 2023, increasing the dividend ratio to 55% (30.4% in 2022), corresponding to the current dividend rate of about 5.9%.

The financial side is more stable, and leverage ratios and financing costs continue to fall. Benefiting from fixed increases in equity and efficient cash repayments, the company's net debt ratio/withholding debt ratio fell to 74%/63% at the end of 2023, and the short-term cash debt ratio remained flat at about 1.8 times. The company issued a total of 9.2 billion yuan of credit bonds in 2023. The average coupon interest rate dropped to 4.0%, and interest rates on new bonds have declined further to 3.4% since 2024. We believe that the average financing cost of the company is expected to gradually converge to the range of leading central enterprises (5.48% at the end of 2023).

In 2023, the sales scale bucked the trend and increased steadily, and high-quality supplies remained eliminated. Against the backdrop of weakening industry sentiment, the company's sales bucked the trend and increased 5% to 126 billion yuan in 2023. In response, Kerry's sales ranking moved 4 places to 14th place at the end of 2022, reaching another record high. We believe that the company's sales are superior to the market mainly due to abundant supply and high quality, contributing to a high flow rate (we estimate the total supply in 2023 to be about 185 billion yuan, of which the new implementation rate is around 80%).

Development trends

High-intensity, high-quality development is expected to support sales to continue to outperform the industry. In 2023, the company strengthened its coverage of core city tenders and project-level equity cooperation. In 2023, it acquired a total of 23 plots (excluding Shenzhen Ice and Snow City), adding 3.07 million square meters of planned construction area, and a full-caliber land price of 81.3 billion yuan. The corresponding land acquisition intensity was over 60%, ranking first in the industry. We estimate that the total value added by the company in 2023 will exceed 150 billion yuan, which has already exceeded that year's sales; moreover, the new supplies are all located in first-tier and second-tier cities such as Shanghai, Guangzhou, Nanjing, Chengdu, and Hangzhou. We estimate that the gross margin before tax is around 25%, which has both profit margin and flow rate. Looking ahead, considering the company's high return efficiency and strong ability to raise capital, we expect that the company will continue to concentrate resources in core cities to ensure an efficient transformation from land acquisition to sales.

There are plenty of resources available, and performance growth can be expected. At the end of 2023, the company's contract debt increased 16% year over year to 93 billion yuan, equivalent to 1.4 times the revenue from housing development in 2023. We believe that the increase in the company's subsequent settlement scale is quite certain. At the same time, considering that the company's new land acquisition project in 2022 will gradually enter the settlement cycle (the net interest rate for the corresponding project will return to 6-8%), we believe there is little room for further decline in profit margins. We expect the company's profit to return to the growth channel this year and next two years.

Profit forecasting and valuation

The 2024/2025 profit forecast was lowered by 31%/36% to $20.2/2.18 billion, considering the potential suppression of profit margins and impairment due to weak industry fundamentals. The current share price corresponds to 0.7/0.7 times 2024/2025 P/B. Maintaining an outperforming industry rating, taking into account profit forecast adjustments and the company's potential flexibility to focus on Tier 1 and 2 cities, the target price was lowered by 19% to 9.2 yuan, corresponding 1.1/1.0 times the 2024/2025 P/B and 47% upward space.

risks

The recovery rate of the urban landscape was weaker than expected; the quality and quantity of new soil storage fell short of expectations.