1H24 results are in line with our expectations

Huafa Co., Ltd. announced 1H24 results: due to the pace of delivery, operating income fell 21% year on year to 24.8 billion yuan; gross margin before tax fell 2.0ppt to 16.8% year on year (18.1% in 2023); net profit to mother fell 34% year on year to 1.26 billion yuan, in line with our previous expectations.

Unblock financing channels and maintain good credit fundamentals. At the end of 1H24, the company's interest-bearing debt was 151.5 billion yuan, an increase of about 7.5 billion yuan from the beginning of the year. Among them, long-term interest-bearing debt remained above 80%, and the debt structure was healthy. Affected by reduced repayments in the first half of the year, concentrated debt payments, and rigid project expenses, the company's cash on hand fell to 34.9 billion yuan at the end of 1H24. At the end of the period, the company's net debt ratio, pre-deducted debt ratio, and short-term cash debt ratio were 86.8%, 61.3%, and 1.0 times, respectively, and remained in the “three red lines” green. In the first half of the year, the company issued 6 new public bonds totaling 5.4 billion yuan (weighted average coupon interest rate of 3.0%), and successfully implemented CCI-Huajin-Huafa Co., Ltd. consumer infrastructure pre-REITs of about 2.1 billion yuan. At the end of the period, the company's comprehensive financing costs declined marginally by 35 BP to 5.13% compared to the end of 2023.

Multiple measures have been taken to eliminate security, and the attitude towards land acquisition is rather cautious. In January-July, the company achieved sales volume of 53.6 billion yuan, a year-on-year decrease of 37% (vs. the top 100 real estate companies down 40% year over year), and Kerry's sales ranking rose 3 places to 11th place compared to 2023. During this period, the company took the lead in introducing a “trade-in” model, and promoted the revitalization and elimination of existing residential, non-residential, and parking spaces through the combination of rental and sales, and geographical linkage. Furthermore, the company announced in August that it plans to trade stock commercial housing and supporting parking spaces with Huafa Group or its subsidiaries. The total transaction amount will not exceed 12 billion yuan, accounting for about 40% of the company's own land storage value in Zhuhai (30 billion yuan). We believe it will help accelerate the elimination of stagnant inventory and accelerate cash return. Under the principle of strict cash flow safety, the company added only 3 new projects in January-July, located in Guangzhou, Shanghai and Chengdu. The total land price was about 6.7 billion yuan, corresponding to a land acquisition intensity of 13% (65% in 2023). Considering that the current market fundamentals are still low, we expect the company to treat investment and development carefully in the second half of the year.

Development trends

Profit levels are expected to recover somewhat throughout the year. At the end of 1H24, the company's contract debt was about 89 billion yuan, which is equivalent to 1.3 times the revenue from the housing development business in 2023. We believe that the scale of the company's subsequent settlement is guaranteed. We expect the annual settlement structure to be similar to the first half of the year. The gross margin level for annual settlement may fall within the 15-17% range, and there is not much room for further decline; superimposed inventory impairment is expected to narrow under last year's high base, and we expect the company's profit level to remain flat and increase slightly this year.

Profit forecasting and valuation

We keep our 2024/2025 earnings forecast unchanged. The current stock price corresponds to 0.7/0.6 times 2024/2025 P/B. Maintaining an outperforming industry rating, considering weak industry fundamentals or suppressing investors' risk appetite, the target price was lowered by 9% to 7.0 yuan, corresponding 0.8/0.8 times the 2024/2025 P/B and 27% upward space.

risks

The recovery rate of the urban landscape was weaker than expected; the quality and quantity of new soil storage fell short of expectations.