Revenue increased in 2023 but profits were under pressure. In 2023, the company achieved operating income of 72.1 billion yuan, +22% year-on-year; net profit to mother was 1.8 billion yuan, -29% year-on-year. On a quarterly basis, 2023Q4's profit performance was poor. The main reason was that the company calculated asset impairment preparations at the end of the year (mainly preparations for inventory price drops) of 1.6 billion yuan, which dragged down 1.1 billion yuan in net profit to mother. 2024Q1, the company achieved operating income of 7 billion yuan, -41% year on year; net profit to mother of 350 million yuan, -35% year over year; quarterly performance was greatly affected by the arrangement of settlement plans.

Profit margins continued their downward trend. Throughout 2023, the company's net interest rate to mother was 2.5%, down 1.8 percentage points from the previous year; on the one hand, it was affected by accrued impairment, and on the other hand, by a decrease in gross margin. In 2023, the company's gross margin was 18.1%, down 2.0 percentage points from the previous year; in addition, net profit returned to mother accounted for 53%, down 1.5 percentage points from the previous year. 2024Q1, the company's net profit margin was 5.0%, while gross profit margin of 15.1% continued to decline.

Sales rankings continue to improve, and there are plenty of resources to be carried over. In 2023, the company signed a sales amount of 126 billion yuan, +5% over the same period, ranking 14th in the industry, up 4 places from the previous year; the sales area was 3.99 million square meters, which was basically the same as -0.4%. With 2024Q1, the company signed a sales amount of 20.4 billion yuan. Although -59% year-on-year decline followed the general trend of the industry, the industry ranked 11th, rising 3 places. By the end of 2023, the company's land storage and construction area totaled 16.23 million square meters, which is quite sufficient; as of the end of 2024Q1, the company's unsettled advance housing payments were 102 billion yuan, providing full guarantees for future performance.

The financial situation is good, and the debt structure continues to be optimized. At the end of 2023, the company's net debt ratio was 74%, down 11 percentage points from the previous year; short-term debt accounted for 16% of total interest-bearing debt, down 2 percentage points from the previous year. In 2023, the company's financing costs were 5.48%, down 0.28 percentage points from the previous year; net operating cash flow reached 50.5 billion yuan, a record high for many years.

Investment advice: Considering the downward pressure on gross margin of the real estate development business and the impact of impairment calculations, we lowered our profit forecast. The company's net profit for 2024/2025 is estimated to be 1.92 billion yuan (the previous forecast was 3.00/3.3 billion yuan, respectively), and the corresponding earnings per share are 0.69/0.72 yuan, respectively. Corresponding to the current stock price PE is 9.2/8.9 times, respectively, to maintain a “buy” rating.

Risk warning: The contracted sales scale, carry-over progress, and profit level of the company's development properties fell short of expectations.