Results for the second quarter of 2024 exceeded our and market expectations

Shell announced results for the second quarter of 2024: revenue increased 19.9% year-on-year to 23.4 billion yuan, significantly exceeding market expectations, mainly due to a recovery in transactions under favorable policies and the company's operating efficiency superior to peers; adjusted net profit of 2.69 billion yuan, which greatly exceeded market expectations, mainly due to the accelerated release of operating leverage in the context of revenue exceeding expectations, corresponding to an adjusted net interest rate of 11.5%. Additionally, the company announced that it will extend the repurchase program originally due to expire on August 31, 2024 to August 31, 2025, and increase the repurchase authorization amount from $2 billion to $3 billion. Since the launch of the company's share repurchase program in September 2022, Shell's cumulative repurchase scale is about 1.39 billion US dollars, and the cumulative number of shares repurchased accounts for about 7.51% of the total shares issued before the repurchase program was initiated.

Development trends

The main business focuses on quality growth. In the second quarter of 2024, thanks to the intensive implementation of favorable policies on both the supply and demand sides, high-tier city housing stock trading activity recovered significantly, driving a 25% year-on-year increase in platform housing stock GTV to 570.7 billion yuan; the year-on-year decline in GTV for new homes on platforms narrowed month by month, falling 20% year on year to 235.3 billion yuan in the second quarter. Looking ahead to the third quarter of 2024, the policy effect is compounded by seasonal summer effects. We expect that the platform's housing stock GTV may decline month-on-month (about 10% year-on-year increase, considering the gradual decline of the previous year's base figure impact); it is expected that the platform's new housing GTV may record a year-on-year increase of about 15%, which is expected to continue to exceed the market's performance. In view of the increase in fixed costs brought about by the company's continued store encryption and broker expansion in the first half of the year, we expect that the profit margin contributed to the stock housing business may decline in the third quarter, and the profit margin contributing to the new housing business will remain relatively stable.

Emerging businesses are progressing steadily. In the home improvement and home furnishing business, the contract amount in the second quarter reached 4.21 billion yuan, up 22% year on year; revenue reached 4 billion yuan, up 54% year on year. The revenue growth rate was faster than the contract growth rate, mainly due to the shortened delivery cycle driven by improved delivery capacity. In terms of the housing rental service business, revenue for the quarter increased 167% year-on-year to 3.2 billion yuan, mainly due to the rapid increase in the scale of managed properties.

Profit forecasting and valuation

The 2024/25 revenue forecast remains basically unchanged; considering that the company will increase strategic investment in the short term to further enhance market competitiveness and expand medium- to long-term growth space, we lowered the 2024/25 adjusted net profit forecast of 11.0%/10.5% to 8.71 billion yuan/10.91 billion yuan. We are optimistic about the competitiveness and development prospects of the Shell one-stop residential service platform and maintain an industry performance rating; despite increasing strategic investment or affecting short-term profits, we are optimistic about the steady profitability and potential profit release space of the company's main business and new business, and maintain the target price of $20 (considering net cash and giving a 20% discount, based on 14 times the 2024 price-earnings ratio; currently trading at 9 times the 2024 price-earnings ratio of the same caliber), corresponding to 35% upward space.

risks

Industry sentiment is declining; regulatory policies are changing; new businesses are falling short of expectations.