Matters:

The company's revenue for the first half of 2024 was 9.654 billion yuan, up 71.94% year on year, and net profit loss to mother was -1.984 billion yuan, down 172.34% year on year.

Commentary:

The gross profit margin of the real estate development business in the first half of the year was -2.5%, accounting for asset impairment of 1.1 billion yuan. The main reasons for the pressure on the company's profits are: 1) The housing development business was launched along with various sales strategies, including adjusting sales prices, to promote the elimination of project sales. The gross profit margin of the real estate development business was -2.5% in the first half of the year, down 0.7 pcts from the same period in 2023; 2) the company calculated asset impairment of 1.13 billion yuan.

In the first half of 2024, sales fell 42% year on year, and the settlement capacity by the end of June was about 12.96 million square meters.

1) In the first half of 2024, the company achieved a sales contract amount of about 9.09 billion yuan; the sales contract area was about 0.499 million square meters. 2) In recent years, the company has been very careful in acquiring land. In 2022 and 2023, it obtained 1 parcel of residential land in Tianjin and Suzhou, respectively, with land prices of 3.5 billion yuan and 1.2 billion yuan respectively; in the first half of 2024, it acquired two parcels of residential land in Tianjin through equity acquisitions. The purchase price was about 1.3 billion yuan, taking into account the construction area of about 0.16 million square meters.

3) By the end of June, the company's total land storage (land area that can be settled) was about 12.96 million square meters, of which first-tier cities accounted for 23%, second-tier cities accounted for 36%, and third- and fourth-tier cities accounted for 42%. Among them, land storage in third- and fourth-tier cities was mainly concentrated in Langfang, Hebei, and Huizhou, Guangdong.

The property leasing and operating business is relatively stable. The total revenue for the first half of the year was 1.06 billion yuan, accounting for about 11% of revenue. 1) The revenue from the property leasing business in the first half of the year was about 0.86 billion yuan, down 3.21% year on year, and gross margin was about 88%, down 1.36 pcts from the same period in 2023. 2) The operating income of the property management business was about 0.2 billion yuan, up 10.57% year on year, and gross margin was about 23%, up 10.23 pcts from the same period in 2023. 3) By the end of June, the company could rent 1.23 million square meters of property, of which Beijing and Shanghai accounted for about 69%; the operating property asset area was about 0.2 million square meters.

Investment advice: The company's high-energy urban land storage layout is expected to support sales fulfillment in the future, but since 2022, land acquisition has slowed, land storage and warehouse exchanges have been slow, putting pressure on development business revenue and gross profit in the medium to long term; the company holds high-quality assets in core cities, and rent performance is steady against risks. As the downward pressure on housing prices continues, the company's ROE is declining year by year, and the pace of investment and land acquisition is clearly slowing down. We estimate the company's EPS for 2024-2026 at -0.51, -0.19, and 0.11 yuan respectively. We estimate the company's valuation based on the residual income model to discount current book value and future remaining income, and estimate the company's target price of 2.8 yuan in 2024 to maintain the “recommended” rating.

Risk warning: The market declined beyond expectations, and subsequent investments fell short of expectations.