Description of the event

In 2024H1, the company achieved revenue of 139.2 billion yuan (+1.7%), net profit attributable to mother of 7.4 billion yuan (-39.3%), and net profit not attributable to mother of 7.2 billion yuan (-38.3%); in addition, the company plans to issue convertible bonds to specific targets, with a total issuance of no more than 9.5 billion yuan.

Incident comments

The revenue side remained relatively stable, with profit margins under pressure and declining equity ratios eroded performance. 2024H1 achieved a completed area of 13.8 million square meters (-13.0%); the settlement side performed better, and full-caliber settlement area/amount/average price were -0.2%/+17.3%/+17.5%, respectively. In the final table, development and settlement revenue was 127.8 billion yuan (+1.8%), and the company achieved revenue of 139.2 billion yuan (+1.7%), which remained relatively stable overall. Gross margin is still under pressure under cyclical pressure. The 2024H1 company settled a gross profit margin of 15.8% (-5.6pct, 16.3% for the full year of the previous year), but the comprehensive gross margin of 16.0% was in line with the full year of the previous year. Although the increase in investment income and effective rate control hedged against the decline in profit margins, 2024H1 minority shareholders' share of profit and loss increased due to the settlement project structure, and in the end, the company achieved net profit of 7.4 billion yuan (-39.3%) to mother.

In terms of follow-up prospects, the 2024 completion target is 34 million square meters (-16.1% compared to the actual 2023 price), but the rising average sales price in the previous period may be gradually reflected in back-end settlement; advance receipt and potential carry-over volume are relatively abundant (2024H1 pre-receiving/annualized settlement is 1.10, 103.3 billion yuan of funds already sold to be returned), and the company's performance is expected to gradually improve as low-cost land is settled one after another.

Demand is pressured in the short term, and investments are becoming more prudent, and inventory restructuring is being firmly removed. 2024H1 was affected by sluggish industry demand and the pace of supply. The company achieved sales volume of 173.3 billion yuan (-26.8%), an area of 9.54 million square meters (-31.0%), and an average price of 0.0182 million/square meter (+6.2%), of which 38 core cities contributed 89% of sales. Under sluggish demand performance, the company is more inclined to use sales to determine production, and the land acquisition side is more cautious. The 2024H1 land acquisition amount is 12.6 billion yuan (-82.2%), the area is 1.16 million square meters (-69.9%), and the average price is 0.0109 million/square meter (-40.9%); the land acquisition amount intensity is 7.3% (-22.7 pct), and the land acquisition intensity is 12.1% (-15.7 pct). The reduction in land acquisition also confirmed the company's determination to remove inventory. Mid-year land storage fell 8% to 71.4 million square meters from the beginning of the year, and the amount of residential area already under construction and unsold fell 16% compared to the beginning of the year; in addition, the remaining cash also laid the foundation for the company to supplement high-quality land storage in the second half of the year (for example, in July, the company's high premium rate competed for the Pingliang plot in Yangpu, Shanghai). Considering that the company still has relatively abundant land reserves, the increase in construction will lay the foundation for supply in the second half of the year (2024H1 starts 6.77 million square meters, +8.2% year over year; plans to start 18 million square meters for the whole year, +20.7% compared to 2023), and policy optimization expectations, the decline in sales may narrow throughout the year.

Financing advantages are highlighted, and it is proposed to issue convertible bonds to further optimize the debt structure. As of 2024, the company's three red line indicators continued to maintain the “green level”. The average additional financing cost in the first half of the year decreased by 21 bps to 2.93% compared to 2023, and the comprehensive financing cost for mid-year stock interest-bearing debt was 3.31% (down 25 bps from the beginning of the year), highlighting the financing advantages of central enterprises. It is intended to issue no more than 9.5 billion convertible bonds to specific targets, with a term of six years. Of these, Poly Group promises to subscribe no more than 1 billion yuan in cash.

Issuing convertible bonds will help the company further optimize its debt structure and enhance its financial strength, so that the company can take the lead in future low cost savings and inventory consolidation. The market share is expected to continue to rise, and the company is also expected to gradually enjoy higher valuation premiums.

Short-term cyclical disturbances do not change long-term value, increasing financial strength to help increase forward market share. Although cyclical pressure is inevitable, considering the company's competitive advantages in terms of financing and land acquisition, the expectations implied by the early valuation are already too pessimistic; it is only necessary to wait for a repair opportunity to release greater flexibility. The pattern optimization is the company's long-term investment logic. The proposed issuance of convertible bonds provides a catalyst for an increase in market share, and the company's valuation can be expected to be repaired. The company's net profit for 2024-2026 is expected to be 11.6/12.6/12.9 billion yuan, respectively, and the corresponding PE is 8.4/7.8/7.6X, maintaining a “buy” rating.

Risk warning

1. There is some uncertainty about when gross margin will bottom out; 2. If housing prices continue to decline, the company will still have some depreciation pressure.