Actively revitalize stocks for a safe transition

The company released an interim report on August 30. 2024H1 achieved revenue of 142.78 billion yuan (YOY -28.9%), net profit to mother of 9.85 billion yuan (YOY -199.8%), and net profit to mother was slightly lower than the interim report forecast. Due to the sharp decline in gross margin of the real estate development business and the impact of impairment preparations during the downward cycle of market sentiment, we adjusted the 2024-2026 EPS to -0.83/0.03/0.05 yuan (previous value: 0.72/0.78/0.82 yuan), the BPS was 20.19/20.22/20.27 yuan, and the average PB for A shares (000002 CH) in 2024 was 0.34 times (Wind), with a target price of 6.86 yuan (previous value) $8.64), downgraded to “hold”; H shares (2202 HK) were reduced to “hold” by referring to the average discount rate of 43% this year. A shares were discounted by 43%, and the target price was HK$4.30 (previous value HK$5.35).

The main reasons for the company's large losses during the loss period due to the decline in settlement revenue and gross margin, compounded impairment and asset revitalization in exchange of price for volume were: 1) 33.4% of the completed area, leading to 34.6% to 111.68 billion in settlement revenue, and settlement gross margin -13.5pct to 6.8%, as high-land price projects obtained 22 years ago dragged down profits; 2) Asset transaction losses due to active inventory revitalization; 3) Non-main financial investment (PROS) formed a book loss of 1 billion: 4) Inventory reduction The total value and credit impairment added up to 4.2 billion. Due to the decline in industry sentiment, the sales scale has shrunk further. The sales amount was 127.3 billion yuan, or -37.6% YoY. The investment was prudent, and the equity amount of land acquired during the period was 0.93 billion. At the end of the period, land reserves were -20.7% YoY. The overall development business contracted, and the asset management business grew steadily. Property management/rental housing/commercial business revenue increased 9.5%/5.3%/6.7% year-on-year respectively.

Actively promote large-scale transactions and speed up inventory revitalization to achieve a safe transition In the 23 year report, the company stated that its strategic focus this year is to achieve safe transition and transformation through measures such as revitalizing stocks and reducing leverage. The company focused on removing inventory, actively promoting large-scale transactions and resource revitalization, and gradually withdrew from non-main business and investment. The total repayment of 137 billion yuan was made during the three initiatives during the period. Of these, 20.4 billion yuan was signed for major transactions, achieving a total repayment of more than 10 billion dollars. In terms of REITs, Q2 successfully sold the CICC Yinli consumer infrastructure REIT, raising a net capital of 3.26 billion yuan. The Huaxia Wanwei Warehouse REIT has been accepted by the Securities Regulatory Commission, with an initial capital raising amount of about 1.16 billion yuan. The guaranteed housing REIT has also been submitted to local development and reform commissions for approval and is gradually progressing. In addition, 2 pre-REITS funds have been set up, totaling 12.2 billion, to help revitalize the company's stock.

Short-term debt pressure increased, and financing policy support helped the company overcome the winter to put pressure on the company's short-term debt. Interest-bearing debt increased slightly. The net debt ratio at the end of the period was +7.4pct to 62.0% year over year, and the short-term cash debt ratio was less than 1 times. However, with the help of policies such as operating property loan policies and urban financing coordination mechanisms, 61.2 billion yuan of financing was achieved during the period, adding 3.66% of the comprehensive financing cost. Public debt was repaid by 17.7 billion in the first 7 months, and interest-bearing debt+supply chain financing fell by 17.2 billion yuan. As of the release date of the interim report, only 2 billion yuan of the company's public debt during the year matured in September. Active stock revitalization is expected to ease the pressure on the company's cash flow.

Risk warning: downside risk in industry sales, credit risk of housing enterprises.