Matters:

In the first half of 2024, the company achieved operating income of 86.9 billion yuan, a year-on-year decrease of 2.5%; net profit attributable to ordinary shareholders was 10.3 billion yuan, a year-on-year decrease of 23.5%.

Commentary:

The gross profit margin for the first half of the year was 22.1%, and the outstanding amount sold was 210.9 billion yuan, up 13.5% from the end of 2023.

1) The company's gross profit margin for the first half of 2024 was 22.1%, and the core net profit margin attributable to shareholders was 12.2%. 2) As of the end of June 2024, the outstanding amount sold by the group's affiliated companies (excluding CNOOC Hongyang) was 210.9 billion yuan, an increase of 13.5% over the end of 2023 to guarantee the 2024 carry-over volume.

Core city improvement projects guarantee sales amounts, and land reserves are carefully replenished. The investment intensity in the first half of the year was only 8.1%.

1) In the first half of 2024, the company achieved a sales area of 5.44 million square meters, down 32.3% year on year; sales amount was 148.4 billion yuan, down 17.6% year on year, and the average contract sales price was 27,279 yuan/square meter, up 21.7% year on year. The main reason is that high-end improvement projects in core cities contributed a large amount of sales. In the first half of the year, the company's contract sales in first-tier cities were 74.4 billion yuan, accounting for 62.7% of total sales. Among them, sales amounts in Shanghai, Beijing, Shenzhen, and Guangzhou were 34 billion yuan, 19.3 billion yuan, 10.7 billion yuan, and 10.5 billion yuan respectively. 2) The company is cautious about adding land storage. From January to June 2024, the group's affiliated companies (excluding Zhonghai Hongyang) acquired only 6 parcels of land, with a total land price of 12 billion yuan, an investment intensity of about 8.1%, and an equity land price of 11.4 billion yuan. They are located in Beijing, Xi'an, Tianjin and Jinan, respectively. As of the end of June 2024, the company's total land reserves were about 33.22 million square meters, and the equity construction area was 28.86 million square meters.

In the first half of the year, commercial operating revenue increased 20% year over year, and shopping center operating revenue increased 57.6% year over year. 1) By the end of June 2024, the company's commercial operation scale was 8.71 million square meters, of which 85% were asset-heavy and 15% asset-light operations; 2) Commercial operating revenue in the first half of the year was 3.54 billion yuan, up 20% year-on-year, with office buildings and shopping malls accounting for 50% and 31% respectively. Shopping center occupancy rates in the first half of the year were 96.6%, and sales and passenger traffic increased 30% and 28% year-on-year respectively, driving a significant increase of 57.6% to 1.11 billion yuan.

Cash flow is stable, and financing costs maintain an advantage. As of the end of June 2024, the company's balance ratio was 56.1%, bank balance and cash holdings were $100.2 billion, and operating cash flow continued to be positive; in the first half of 2024, the company's average financing cost was 3.5%, and the total distribution and administrative expenses accounted for about 3.9% of revenue, leading the cost efficiency ratio in the industry.

Investment advice: As a leading state-owned enterprise, the company has low financing costs and sufficient saleable value. Considering that the industry is in the adjustment stage, we expect the company's revenue for 2024-2026 to be 217.6, 228.9, and 242.5 billion yuan, respectively, and realized net profit attributable to ordinary shareholders of 27.3, 29.1, and 31.2 billion yuan, respectively, and the corresponding EPS of 2.50, 2.66, and 2.85 billion yuan, respectively. Referring to the average price-earnings ratio of comparable high-quality leading companies, we gave the company 6.6 times PE in 2024, with an estimated market value of about HK$197.1 billion, corresponding to a stock price of HK$18, maintaining a “recommended” rating.

Risk warning: The industry continues to shrink unilaterally, and the market is declining beyond expectations.