1H24 results fall short of our expectations

The company announced 1H24 results: due to the decline in the scale of recoverable resources, operating income fell 43% year on year to 21.1 billion yuan; gross margin before tax fell 5.4ppt to 11.1% year on year; due to asset impairment and credit impairment, net profit to mother recorded a loss of 3.36 billion yuan (1H23 was 1.53 billion yuan), corresponding to a marginal decline of 20.1ppt to -15.9% in net profit margin attributable to mother, lower than our expectations.

Development trends

Actively raise funds, pay US dollar bonds as scheduled, and debt pressure is relatively manageable during the year. Since 2024, the company's multi-channel financing has maintained cash flow balance, credit/pledging shares in Beijing Jindi Center and Jindi Property to CMB and CCB, and was granted a total loan of 6.5 billion yuan (40+25). As of the end of August, the company had paid a total of 9.1 billion yuan of principal of domestic credit bonds, and 0.48 billion US dollars of foreign bonds due in August; the remaining outstanding debt was 7.4 billion yuan. Of these, 2 total 3 billion yuan of outstanding debt were due in November to December. At the end of the reporting period, group-level cash on book fell 50% year on year to 23.1 billion yuan, of which the parent company's cash was 1.1 billion yuan, and the short-term cash debt ratio fell to 0.56x (0.7x in 2023), maintaining the three red lines of the “yellow level”. We judge that the peak of the company's payment pressure has passed, and the certainty of near-end debt payments continues to increase. Investors are advised to pay attention to the company's subsequent sales performance and capital raising progress.

Land acquisition is cautious, and sales performance is expected to continue to be under pressure in the short to medium term. In order to ensure that public bonds are paid as scheduled, and the property market sentiment continues to weaken, the company drastically cut front-end investment, and no new land storage was added from August 2023 to the end of the reporting period. Since 2022, insufficient replenishment efforts have significantly dragged down the company's sales performance. In January-July of this year, the company's cumulative contract sales were -56% year-on-year, weaker than the top 100 (-40%) during the same period. We estimate that the value of unsold goods at the end of 1H24 was about 300 billion yuan, and the average decline in removal capacity and profit margin levels; looking ahead, we judge that the company is likely to continue its cautious investment attitude until financial pressure substantially improves, so we look at sales performance in the short to medium term or maintain the previous trend of contraction.

Performance may continue to be under pressure. It is recommended to focus on the company's high elasticity alpha in sector trading opportunities. Taking into account the quality of unsold inventory and land acquisition, sales and operation performance, we determine that the company's revenue scale from 2024-2025 may decline by at least two to three years, and continue the loss trend in order to gradually remove the problematic asset burden. Furthermore, as credit risk exposure gradually narrows, the company's stock price has shown high elasticity in sector consolidation since 2Q24.

Profit forecasting and valuation

The scale of outstanding resources in the company's development business shrank and went downhill. We lowered net profit to mother in 2024/2025 to a loss of 4.8 billion yuan and a loss of 5.5 billion yuan. The current share price is trading at 0.24x/0.26x in 2024/2025 P/B multiples. We maintained the company's neutral investment rating and lowered the company's target price by 25% to 3.85 yuan/share, corresponding to the 2024/2025 P/B ratio of 0.29x/0.32x, with 20% upside compared to the current stock price.

risks

The decline in the company's debt repayment capacity exceeded expectations, operation-side sales performance fell short of expectations, and the supply-side financing support policy of the industry fell short of expectations.