1H24 results are in line with market expectations

China Merchants Shekou announced 1H24 results: revenue fell 0.3% year on year to 51.3 billion yuan; gross margin before tax/after tax fell 4.3/3.1 ppt to 12%/10% year on year (16%/12% for the full year of 2023); net profit to mother fell 34% year on year to 1.4 billion yuan, in line with the performance report. The company's net profit falling by about 30% was mainly due to a decrease in gross margin for settlement of development operations and a decrease in investment income from the transfer of shares in subsidiaries (the company recorded an investment income of 0.81 billion yuan due to the expansion of REITs in the same period last year); after excluding the influence of this factor, the company's net profit without return to mother increased 0.4% year-on-year to 1.4 billion yuan.

Sales in the first half of the year fell by about 40% year on year, and high-quality savings were carefully developed. 1H24 achieved sales of 101 billion yuan, down 39% year on year (vs. top 100 real estate companies down 42% year on year) and remained in the top five in the industry; the company's sales pressure in the first half of the year was mainly due to a decrease in the scale of new sales due to weak market sentiment. Considering the general principle of “investment based on sales”, the company was cautious in investment development in the first half of the year. The total land price was about 0.8 million square meters, and the total land price was about 14.6 billion yuan (65% decrease over the previous year). The corresponding land acquisition intensity and equity ratio were 14% and 68%, respectively (1H23 was 25% and 83%), respectively. Despite a contraction in investment and development efforts, the company's new land storage continues to be of high quality. The layout cities include Shanghai, Chengdu, Hefei, Nanjing, Zhengzhou, Guangzhou and Sanya; we estimate that the company's profit margin for land acquisition in the first half of the year was about 18-20%, which is basically the same as the full year of 2023.

The financial situation is stable, and the financing advantage is strong. At the end of 1H24, the company's cash on hand narrowed slightly by 6% to 82.8 billion yuan compared to the beginning of the year. The net debt ratio, withheld debt ratio, and short-term cash loan ratio were 59.2%, 62.4%, and 1.6 times, respectively, and remained in the “three red lines” green category. The company issued a total of 4 ultra-short bonds and 2 corporate bonds in January-August, with a cumulative financing amount of 9.7 billion yuan. The weighted average coupon interest rate was only 2.2% (the average interest rate for new bonds issued in 2023 was 2.9%), driving the average financing cost at the end of 1H24 to a marginal decline of 22BP to 3.25% compared to the end of 2023, which has an outstanding advantage among central enterprises in key countries.

Development trends

Sales are expected to drop by double digits throughout the year, and the performance side is expected to increase steadily. On the management side, according to the 2023 results conference, the total sales value of the company in 2024 is about 450 billion yuan, of which the new promotion scale is about 130 billion yuan (excluding new land acquisition), and 1H24 actually introduced 70 billion yuan. We expect that the company's new promotion scale in the second half of the year will be higher than the previous plan, and the annual sales scale may fall within the 240-260 billion yuan range, outperforming the industry over the previous year. On the reporting performance side, we expect the company's settlement scale to remain generally stable this year and next. The gross margin of settlement has reached the bottom of 2023. Combined with the Taizi Bay high gross margin project, it is expected that settlement will begin in the second half of this year, thereby supporting the recovery of the gross margin statement. We believe that the company's performance is expected to achieve high single-digit growth this year and next.

Profit forecasting and valuation

We keep our profit forecast unchanged. The current stock price corresponds to 0.7 times the 2024 net market ratio and 0.7 times the 2025 net market ratio. Maintaining the outperforming industry rating and target price of 12.05 yuan unchanged, corresponding to 0.9 times the 2024 net market ratio and 0.9 times the 2025 net market ratio, there is 31% room for improvement compared to the previous stock price.

risks

The recovery of industry fundamentals is slower than expected; settlement progress or profit margins are lower than expected.