Abstract: Huafa Co., Ltd. announced its 2023 annual report. The company achieved total operating revenue of 72.14 billion yuan, an increase of 19.4% year on year; net profit to mother was 1.84 billion yuan, down 29.6% year on year. The company plans to pay a cash dividend of 3.7 yuan (tax included) for every 10 shares, with a dividend rate of 55.41%.

The company's revenue scale is growing steadily, performance is under pressure, and there are plenty of resources to be settled. In 2023, the company's revenue increased 19.4% year on year, and net profit to mother decreased by 29.6% year on year, mainly due to: 1) The decline in settlement profit margin. The company's gross margin was 18.1%, down 2.0 percentage points year on year. 2) Investment income fell sharply by 81.7% year over year to 280 million yuan. 3) Affected by the market environment, the company accrued asset impairment losses of 1.59 billion yuan (760 million yuan in 2022). 4) Joint venture project settlement profit increased, and minority shareholders' profit and loss/net profit increased slightly by 0.5 percentage points year over year to 47.0%. In 2023, the company's net interest rate and net profit margin to mother were 4.8% and 2.5%, respectively, down 3.3 and 1.8 percentage points from the previous year. The three rates improved markedly, down 0.7 percentage points to 5.7% year on year. Among them, employee remuneration decreased and management expenses decreased 15.0% year over year. Affected by the decline in profit margins, the company's ROE fell 5.1 percentage points year over year to 8.3 percent. By the end of 2023, the company's accounts receivable (including contract liabilities) were 93.5 billion yuan, an increase of 15.7% over the previous year. The amount of accounts received/revenue reached 1.30X. There are plenty of resources to be settled, and the degree of future performance guarantee is still high.

The company optimized its debt structure, financing costs continued to decline, and the “three red lines” continued to maintain the “green file”; successfully completed fixed increases. By the end of 2023, the company's interest-bearing debt was 128.7 billion yuan, a year-on-year decrease of 2.2%. Of these, interest-bearing debt maturing within one year accounted for only 19.6%, which was the same as the previous year. At the end of 2023, the company's balance ratio after excluding advance payments was 63.2%, and the net debt ratio was 62.6%, down 2.9 and 9.2 percentage points from the previous year, respectively. The short-term cash debt ratio was 1.83X, down 0.23X from the previous year, and the “three red lines” remained stable in the green tier. The company's financing costs have continued to decline in recent years. By the end of 2023, the company's average financing cost was 5.48%, down 0.28 percentage points from the previous year. The company actively carried out equity financing. In November 2023, it successfully completed the issuance of shares to specific targets, raising more than 5.124 billion yuan. The controlling shareholder Huafa Group participated in the issuance subscription amount of about 1.46 billion yuan, accounting for 28.5% of the total capital raised. From January to April 2024, the company issued 850 million yuan of ultra-short-term financing notes, 750 million yuan of corporate bonds, and 610 million yuan of medium-term notes.

The company has abundant operating cash flow and is focusing on sales repayment. By the end of 2023, the company's monetary capital was 46.3 billion yuan, a year-on-year decrease of 13.1%. Operating cash flow is abundant. In 2023, the company's net operating cash flow inflow was 50.5 billion yuan, up 31.1% year on year. On the one hand, the company's sales repayment was 84.7 billion yuan, up 17.2% year on year; on the other hand, the company's revenue and expenditure reduced land and construction expenses, and cash from purchasing goods and receiving labor payments decreased 11.7% year on year. The company's net fund-raising cash flow in 2023 was $11.4 billion, up 5.7% year over year.

Real estate development business: 1) Sales: Sales rankings continue to improve, and the structure continues to be optimized. In 2023, the company achieved sales volume of 126 billion yuan, up 4.8% year on year, and the sales ranking rose to 14th place, up 4 places from the full year sales ranking of 2022; sales area was 3.99 million square meters, down 0.4% year on year; average sales price was 31,500 yuan/square meter, up 5.2% year on year; equity sales amount was 87.3 billion yuan, with a sales equity ratio of 69.3%, a significant increase of 6.8 percentage points over the previous year. The company adjusted and optimized the organizational structure framework, established the Beijing Business Promotion Center of the Board of Directors, completed regional integration between East China and Beijing, and formed a “3+1" business layout. The East China region completed annual sales of 69.3 billion yuan, accounting for 55.0% of the company's sales; South China completed annual sales of 31 billion yuan, accounting for 24.6% of sales, with a significant increase; the Zhuhai region completed annual sales of 19.1 billion yuan, accounting for 15.2% of sales, which is a stable leading position in Zhuhai; the northern region completed sales of 6.6 billion yuan throughout the year, accounting for 5.2% of sales. According to Kerry, 2024Q1's sales amount was 20.4 billion yuan, down 58.5% year on year, sales area of 690,000 square meters, down 58.3% year on year, and the average sales price was 29,700 yuan/square meter, down 0.6% year on year. However, the sales ranking continued to rise to 11th place. 2) Land acquisition: Land acquisition focuses on Tier 1 and 2 cities. In 2023, the company added 23 new land projects through public auctions, cooperative development, etc., with a construction area of 4.97 million square meters. They are all located in Tier 1 and 2 cities at the core of the company's key strategic layout. According to Kerry, in 2023, the company ranked 11th in the land acquisition list with a total land acquisition amount of 40.7 billion yuan (the amount of land acquisition was basically the same as the same as the previous year, and the land acquisition intensity was 32.3%). 3) Affected by the decline in early sales, the company started a new construction area of 2.05 million square meters in 2023, a year-on-year decrease of 28.3%, and a completed area of 5.15 million square meters, a year-on-year decrease of 22.0%.

Focusing on the main residential business, the company continues to strengthen and improve the “three major supports” of commerce, property, and upstream and downstream industries. The commercial sector continues to improve its management level while supporting its main business. In 2023, 300,000 square meters of concentrated commerce and 47,000 square meters of community commerce (including base business) will be opened. Property companies' business development capabilities and service quality have continued to improve. They have successfully won the bid for projects such as Hengqin's “Second Line” property management (property services for “second-tier” channels and sites in the Hengqin Guangdong-Macao Deep Cooperation Zone), and have reached new heights in the managed projects and area under management. In 2023, Huafa Property Services (Huafa Co., Ltd. holds 36.88% of the shares and is the controlling shareholder of the company) achieved revenue of 1.78 billion yuan, up 11.0% year on year, and net profit to mother of 249 million yuan, up 28.8% year on year. By the end of 2023, Huafa Property covered 42 cities, 390 projects under management, an increase of 29% over the previous year, and the contract area was 60.64 million square meters, up 17% year on year. Upstream and downstream industrial chains and overseas companies have improved quality and efficiency. The marketing company received multiple customers, and all key business indicators were exceeded. The update company continues to advance key projects and has made some progress. The design company cooperated in technical services such as improving product strength, and completed 69 patent applications. YouLife (the rental housing business division of Huafa Co., Ltd.) has expanded its operating stores to 19, with a total housing volume of 5,786 units (13,742 units). The agency continues to expand its platform business.

Investment recommendations and profit forecasts:

As a typical growing local state-owned enterprise, the majority shareholders have strong strength, good liquidity, and financing costs have declined further. The company achieved high-quality growth in sales and repayments in 2023. In the past two years, it has significantly added high-quality soil storage in core cities, and the layout focus has shifted to East China, which has better fundamentals. The speed of project removal and settlement quality are expected to be further improved in the future. In view of the current slump in industry sales, and taking into account the latest situation in the annual report, we have adjusted the company's profit forecast. We expect the company's revenue for 2024-2026 to be 775/84.4/93.9 billion yuan respectively, with year-on-year growth rates of 7%/9%/11%; net profit to mother will be 18.19/ 20 billion yuan, with year-on-year growth rates of 1%/3%/8%, respectively; corresponding EPS of 0.67/0.69/0.74 yuan, respectively. The PE corresponding to the current stock price is 9.3X/9.1X/8.4X, respectively. However, considering that the company's sales and investment are all resilient, the sales and unsettled resources are abundant, the degree of future performance guarantee is high, and the purchase rating is maintained.

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.