The gross margin of the development business was under pressure, and the asset operation business increased steadily. Maintaining the “buy” rating, China Merchants Shekou released its 2024 mid-year report. Affected by the decline in gross carry-over margin, the company's carry-over performance fell short of expectations.

The company's land acquisition focuses on core cities. The saleable supply is sufficient, financing channels are unobstructed, and it is optimistic that the performance will continue to recover after the carry-over of low-cost projects is completed. We maintain our profit forecast. We expect the company's 2024-2026 net profit to be 6.39, 7.03, 7.44 billion yuan, EPS 0.71, 0.78, and 0.82 yuan. The PE corresponding to the current stock price is 13.1, 11.9, and 11.2 times, maintaining a “buy” rating.

The carry-over gross margin declined, and net profit after deducting non-net profit remained basically flat

In the first half of 2024, the company achieved total operating income of 51.27 billion yuan, -0.3%; realized net profit to mother of 1.42 billion yuan, or -34.2% year on year; realized deducted non-net profit of 1.4 billion yuan, +0.45% year over year; realized net operating cash flow of 1.29 billion yuan, or -95.1% year on year; gross margin decreased 4.3 pct to 12.0% year on year, with gross margin of development business falling 5.6 pct to 12.2% year on year. The decline in the company's net profit to mother was mainly due to a year-on-year decline in the gross margin carried over from the company's development business projects, and a year-on-year decrease in investment income from the transfer of shares in subsidiaries, and a year-on-year decrease in net investment income of 0.35 billion yuan.

The sales equity ratio increased, and the intensity of land acquisition decreased in the first half of the year

In the first half of the year, the company achieved a sales amount of 100.95 billion yuan and a sales area of 4.387 million square meters, respectively. The sales equity ratio was +9pct to 65% year over year, and the initial launch and removal rate of new projects was +17 pcts year over year. The sales amount ranked fifth in the Kiryu list. The company obtained 7 parcels of land in the first half of the year, located in Tier 1 and 2 cities such as Shanghai, Guangzhou, and Chengdu. The planned construction area was 0.801 million square meters, the total land price was 14.61 billion yuan, down 64.9% year on year, 68.4% (76.5% for the whole year of 2023), and the land acquisition intensity was 14.5% (38.6% for the whole year of 2023), and the land acquisition effort decreased. The company obtained 1.78 million square meters for contract construction projects and 0.163 million square meters for asset-light projects in the first half of the year.

Asset operating income increased year-on-year, and financing costs continued to fall

The company achieved asset operating income of 3.6 billion yuan in the first half of the year, +15% compared to the same period last year. Among them, revenue from industrial parks, centralized businesses, apartments, office buildings and hotels was 5.7, 8.4, 0.63, 0.65, and 0.5 billion yuan respectively. The company's three red lines remained green. By the end of the first half of the year, the pre-debt ratio was 62.42%, the net debt ratio was 59.17%, and the short-term cash debt ratio was 1.63; the share of interest-bearing debt maturing within one year decreased by 3.34 pcts to 16.7% compared to the end of 2023. The company increased financing costs by 3.01% in the first half of the year and comprehensive capital costs at the end of the period by 3.25%, a decrease of 22 BPs compared to the beginning of the year.

Risk warning: Market recovery falls short of expectations, housing price regulation exceeds expectations, diversified business operations fall short of expectations.