The company's recent situation

The company recently attended the 2024 Mid-Term Strategy Meeting held by CICC, during which time it had in-depth exchanges with investors on the company's recent situation.

reviews

High quality soil storage, excellent product strength and strong incentives support sales elimination performance superior to peers. The company's total sales volume in January-May was 54.7 billion yuan, down 30% year on year, and the decline was slightly less than the industry average (average year-on-year decline of 37% and 44% for Crewe Top 10 and Top 20 real estate companies). We think this is mainly due to:

1) High quality soil storage: 84% of the unsold value at the end of 2023 was located in Tier 1 and 2 cities, 70% were Xintuo projects in 2022/23; 2) Focus on resale and removal of the old market: the company seizes the high market boom period and firmly strengthens inventory project removal. We estimate that in addition to sales volume of about 4 to 5 billion yuan in January and April, the sales amount of the renewal project remained at 75-85 billion yuan in 2, 3 and May; 3) The removal performance of the initial project was strong:

The company opened more than 20 new projects in January-May, with an average removal rate of over 50% in the first month of operation.

The intensity of land acquisition is ahead of peers, and qualitative savings are balanced in terms of liquidity and profitability. The company acquired a total of 11 plots of land in January-May, with a total land acquisition intensity of about 43%, corresponding to a total supplementary value of 43 billion yuan. If you consider the 4 projects completed this year, the total supplementary value is 53 billion yuan, which is roughly equivalent to the total caliber sales amount in January-May. Judging from the structure of the new land plot, with the exception of the Longyan plot, the rest are all located in the top tier 1 and 2 cities (of which Hangzhou accounts for nearly 80% of the value of goods; the rest is distributed in Shanghai, Xiamen, Wuhan, and Changsha). We estimate that the net profit margin at the level of new land acquisition projects is about 6%. Although it is slightly lower than the profit margin level for land acquisition in 2022/23, the speed of removal may be more guaranteed. We estimate the overall IRR of about 10-20%.

We expect the company will continue to focus on supplementing high-quality resources in core cities in the future, adhering to the principle of unspent income.

The majority shareholders have firm support, and the financing side has a strong advantage. The company's financial indicators at the end of 2023 continued to improve year-on-year: the deducted debt ratio/net debt ratio declined by 1.6/19ppt to 61.6%/33.6%, and the ratio of short-term cash loans was nearly 5 times higher. Thanks to the state-owned asset background and prudent financial management (bank loans accounted for 38% of interest-bearing liabilities at the end of 2023, majority shareholders' loans accounted for 56%, and short-term bonds only 13%), the average interest rate for new bank loans in 2023 was only 2.2%, and the average financing cost at the end of the year fell 22ppt to 3.75% from the end of 1H23, reaching a record low. Since this year, the company's parent company, C&D Real Estate, has issued a total of 2 billion yuan of 6-year medium-term notes, with a weighted average financing cost of only 3.20%. We expect the average financing cost of the company to continue to decline marginally from the end of 23 until the end of 1H24.

Profit forecasting and valuation

Maintain the 2024-25 earnings forecast. Since the company's stock price soared in late April, it has accumulated a cumulative retreat of about 11% from its high point. Currently, trading is 4.4/4.1 times the 2024-25 P/E, and the dividend yield for this year and next two years will reach 10.3%/10.8%. The company's land storage is efficient, the state-owned asset background, and incentives are perfect. We are optimistic about the return of valuation opportunities in the sector as the sector transitions from game policy to game fundamentals. Maintain an outperforming industry rating and target price of HK$23.20 (corresponding 6.7/6.3 times 2024-25 P/E and 52% upside).

risks

The fundamental recovery of the industry fell short of expectations; the amount and quality of new soil reserves fell short of expectations.