2024H1's revenue was -21.1% YoY, and net profit to mother was -34.4% YoY. In 2024H1, the company achieved operating income of 24.84 billion yuan (-21.1%, same below); realized net profit of 1.265 billion yuan (-34.4%) to mother; realized net profit of 1.185 billion yuan (-38.3%) after deducting non-return to mother. The main reasons for the decline in performance are: (1) due to the downturn in the real estate market and the company's carry-over structure, the company's revenue scale declined, while gross margin continued to decline by 2.1 pct to 16.8%, affecting profit scale; (2) minority shareholders' share of profit and loss increased further to 27.1% (+3.2%). We believe that with the gradual carry-over of low profit margin projects from previous years, projects with higher IRR and net interest rates in core cities obtained since 2022 will gradually be carried over, and profit statements are expected to gradually stabilize.

Sales were under pressure in the first half of the year. We expect the company to moderately increase investment and marketing efforts in the second half of the year. The company's 2024H1 contract sales amount was 45.2 billion yuan (-41.2%), and the decline was close to the average decline of the top 100 real estate companies in Kerry. The company's sales declined significantly in the first half of the year, mainly due to a decline in the company's sales in East China. In the first half of the year, the company's sales share in East China fell 16.9 pcts to 35.9%. In terms of land acquisition, in the first half of the year, the company continued its land acquisition strategy with a high focus on core cities. It acquired two plots of land in Shanghai and Guangzhou, and acquired 0.093 million square meters of land. By the end of the period, the company's total land storage area (to be built+under construction) was 13.72 million square meters, down 15.4% from the end of 2023. Considering the low supply of land in core cities in the first half of the year, the company was relatively cautious about land acquisition, and the trend of shrinking land reserves, we expect the company to make moderate efforts to acquire land in the second half of the year.

Funding channels are unobstructed, and liquidity is worry-free. Financing costs for 2024H1 companies continued to decline. The weighted average financing cost at the end of the period was 5.13% (-46bp), which is expected to drop further. The size of the company's interest-bearing debt at the end of the period was 150.36 billion yuan, up 4.4% from the end of 2023. Of these, debt maturing within 6 months accounted for 6.4%, and long-term interest-bearing debt accounted for more than 80%, and the debt maturity structure was healthy.

Huafa Group, the majority shareholder, has strong support and completed the increase in holdings during the period. At the same time, it plans to acquire the company's existing commercial housing to help optimize the company's land storage structure. During the reporting period, the majority shareholder, Zhuhai Huafa Group completed an increase in its holdings. By the end of March 2024, the cumulative increase in shares accounted for 1.15% of the company's total share capital. As of June 30, Huafa Group held 29.65% of the company's shares. Furthermore, on August 9, the company announced that it plans to trade stock commercial housing and supporting parking spaces with Huafa Group or its subsidiaries, with a total transaction amount of no more than RMB 12 billion. The transaction method is not limited to the direct sale of commercial housing and the sale of shares in real estate project companies. The transaction price determines the final transaction price and signs a formal contract based on the asset evaluation report issued by an asset evaluation company with corresponding qualifications. We believe that the final transaction price will fluctuate based on the registered sales price of commercial housing, but the margin will not be too large to meet the requirements for the acquisition of state-owned assets. We believe this move will help eliminate sales of the stock project in Zhuhai and further optimize the quality of the company's soil storage.

Investment advice: Maintain a “buy” rating. 1. The company has a state-owned background, and the majority shareholder support is strong; 2. The company has made extensive additions to high-quality land storage in core cities, and the focus of land storage has shifted to East China, and sales certainty is strong; 3. Land with high profit margins in recent years will enter the carry-over cycle, and the carry-over amount is sufficient, and the performance is expected to recover steadily. Considering the current downturn in the industry, we adjusted our profit forecast. The company's revenue for 2024/2025/2026 is 68.5/70.11/72.29 billion yuan, respectively; net profit to mother is 1.69/1.66/1.67 billion yuan; the corresponding EPS is 0.61/0.60/0.61 yuan/share; and the corresponding PE is 9.0/9.1/9.1 times.

Risk warning: Policy relaxation fell short of expectations, the decline in gross margin exceeded expectations, and settlement progress fell short of expectations.