The company's recent situation

The company's stock price has accumulated a cumulative increase of 43% since the September low. The current stock price corresponds to 5 times the 2020 price-earnings ratio, which we think is still attractive. Looking ahead, we believe the company will achieve more sustainable and high-quality growth, mainly supported by diversified business development and financial discipline.

reviews

Sales are expected to maintain considerable growth in 2020, and quality has improved markedly. We believe that sales in 2019 may reach 195 billion yuan (+28% year-on-year, 91% completion in the previous 11 months), sales in 2020 will increase 20-25% year over year, and profit margin and equity ratio will improve markedly. We expect the gross sales margin for new projects to be 25-27% from the beginning of 2019 (the actual performance from year to date is 24-25%), and the overall equity ratio will increase to 75% (the average of sales projects from year to date is 45-50%).

The diversified business layout is similar to Longhu. We expect Yongsheng to have a compound profit growth rate of 60% in 2019-21, leading to more than 25,000 business rooms at the end of 2019 (maintaining the top three positions among developers). Furthermore, we expect the company to continue to spend around 10% of annual sales refunds on investment property incubation.

The balance sheet is sound. The company's land acquisition costs accounted for 34% of sales in the first 11 months, and we expect the net debt ratio to stabilize at around 80% (perpetual capital securities are treated as debt). The average financing cost at the end of the first half of the year was 5.9%.

Valuation recommendations

Keep the profit forecast unchanged (compound growth rate for 2019-2021 is about 25%). We expect core net profit of 7 billion yuan (+26.5% yoy) and 9.1 billion yuan (+30% yoy) in 2019 and 2020, and the growth rate may remain around 25% in 2021.

Maintaining the outperforming industry rating, the target price was raised by 9% to HK$7.62 (corresponding to 7.8 times and 6 times the 2019 and 2020 price-earnings ratio, 7% NAV discount, and 22% upside compared to the current stock price) to reflect the recovery in market sentiment.

Xuhui Holding Group (00884) Combines offensive and defensive values, and is optimistic about further improvements in valuation