Key points of investment
One sentence logic: Poly Development is a leading high-quality housing enterprise, fully benefiting from real estate cycle restoration and long-term supply-side optimization.
Logic beyond expectations:
1) On May 17, the Ministry of Housing and Construction and the central bank released major policies one after another
On May 17, the central bank successively relaxed interest rates, down payment ratios, and provident fund loan policies, and the Ministry of Housing and Construction made clear guarantees to advance the transfer of buildings and plans to advance the acquisition of new homes. A policy research framework based on the May 4 “Breaking the Negative Cycle and Exploring Remediation Paths” industry in-depth report. We believe that the short-term frequency and intensity of policies play an important role in reversing real estate demand-side expectations. High-quality leading developers, such as Poly Development, are expected to benefit from fundamental restoration brought about by stronger policies.
2) Guangzhou relaxes purchase restrictions, and Poly Develops Guangzhou's old reform reserves. On January 27, 2024, Guangzhou issued a notice “Further Optimizing Policies and Measures for the Stable and Healthy Development of the City's Real Estate Market”, which clearly optimizes and adjusts the purchase restriction policy, and proposes to purchase housing with a construction area of 120 square meters or more (excluding 120 square meters) within the restricted purchase area, not included in the scope of purchase restrictions. We believe that in Guangzhou, as the first first-tier city to fully liberalize improved housing, the speed and intensity of introducing policies has exceeded our original expectations, which shows the determination of the policy to stabilize real estate.
According to data from Mei Yunxi Consulting, Poly Development has 8 confirmed land reserve projects, covering an area of 5.14 million square meters; it has signed an intention to cooperate with 2 land reserves for old renovation, covering an area of 1.95 million square meters, which ranks among the top among Guangzhou's old renovation reserves. We believe that the Guangzhou New Deal combines three major projects, and Poly Development, as a leading state-owned enterprise headquartered in Guangzhou and with sufficient land reserves in the Greater Bay Area, will fully benefit from the favorable policies.
3) Market value management of central enterprises is to be included in the assessment. Poly Development set an example. On January 24, the press conference of the State Council Information Office proposed that the State Assets Administration Commission will further study the inclusion of market value management in the performance assessment of central enterprise leaders, guide central enterprise leaders to pay more attention to the market performance of listed companies they control, promptly convey confidence and stable expectations through the application of market-based holdings and repurchases, increase cash dividends, and better return to investors. The inclusion of market value management of central enterprises in the assessment is the first time it has been mentioned. We think this is significantly different from the assessment mechanism of central state-owned enterprises that we originally understood. We believe that the new policy direction will encourage central state-owned enterprises to make corresponding improvements in management, repurchases, and dividends, and enhance shareholder returns.
As far as Poly Development is concerned, the company sets an example in terms of repurchases and dividends:
The actual controller quickly implemented the plan to increase their holdings, demonstrating confidence in development
On December 11, 2023, the company plans to repurchase the company's shares through centralized bidding, with a total repurchase amount of 10 (inclusive) to 20 billion yuan (inclusive). In addition, Poly Group, the actual controller of the company, plans to increase its holdings of the company by 2.5 (inclusive) to 500 million yuan (inclusive). As of January 22, 2024, the company announced that Poly Group had increased its holdings of the company by 21.4 million shares, accounting for 0.18% of the total share capital. The cumulative increase in holdings reached 200 million yuan, reaching 80.25% of the lower limit of the planned increase in holdings. We believe that the actual controllers of the company quickly implemented plans to increase their holdings and used practical actions to protect the company's value and shareholders' rights, which fully demonstrated their confidence in the long-term steady development of the company.
The dividend ratio for 23-25 is not less than 40%, boosting investment confidence. On January 20, 2024, the company issued the “2023-2025 Shareholder Return Plan”, which mentions that when the company's undistributed profit is positive, current distributable profit is positive, and the company's cash flow can meet the normal operation and sustainable development of the company, the company will in principle pay a cash dividend once a year. The share of the 2023 to 2025 cash dividends attributable to shareholders of listed companies is not less than 40%. We believe that the company emphasizes that the dividend ratio for the next three years should not be less than 40%. Actively sharing the company's growth can increase annual investor returns.
Inspection and catalysis
1) Industry sales TOP1, market share steadily increasing
According to the company's announcement, in 2023, the company achieved a contract area of 23.86 million square meters, a year-on-year decrease of 13.2%; achieved a contract amount of 422.2 billion yuan, a year-on-year decrease of 7.7%; according to Kray data, the company rose to first place in the full-caliber sales amount list. Compared with the top 100 real estate companies, the sales amount of the top 100 real estate companies decreased by 16.5% year on year in 2023. The company's sales growth rate was significantly superior to the industry average, and the sales base was stable. The company's sales market share in 2023 was 3.6%, up 0.2 pct from 3.4% at the end of 2022, and the company's market share bucked the trend and increased steadily.
2) Land storage focuses on 38 cities, with sufficient reserves for long-term development
In 2023, the company acquired 103 new parcels of land, adding a total land storage price of 163.2 billion yuan, and an equity land price of about 135.9 billion yuan. The land acquisition intensity was 39%. Tier 1 and 2 cities accounted for 92% of the land acquisition amount, focusing on core cities. According to the Qatar list, the company added about 24.2 billion yuan in value added in 2023. It is in the TOP2 of the industry, leading the industry in terms of added value. By the end of the third quarter, the company had a total of 729 proposed projects under construction, with an area of 115.79 million square meters and an area to be developed of 58.55 million square meters. The company has abundant land reserves and sufficient reserves for long-term development.
3) Other inspection and catalysis: the company's subsequent sales, land acquisition, repurchase and dividend progress.
Investment advice
Poly has a solid fundamentals and central enterprise background, and has the advantage of being the “leftover” king in the medium to long term. From 2023Q4 to January 2024, the company's stock price continued to recover. At the beginning of April, PB was already as low as 0.5 times, and the PB valuation rebounded to 0.7 times PB on May 17, which is still significantly lower than the PB valuation of about 0.8-1 times 2023.
We believe that in combination with favorable short-term policies, corporate shareholder buybacks, increased dividend ratios, and historically low valuation, the value of Poly's development allocation is prominent. We expect the company's EPS to be 1.12 yuan per share in 2024, and the valuation is expected to return to 1 times PB and maintain a “buy” rating.
Risk warning: The effect of the relaxation of real estate policies fell short of expectations, and sales declined beyond expectations.