We maintain Vanke H's “buy” rating and a target price of HK$10.00. We saw that Vanke H (the “Company”) continued to weaken in the first half of 2024, but we believe this was fully anticipated by the market. On the other hand, in addition to the Shenzhen Railway Group, we have seen many Shenzhen state-owned enterprises providing support through bulk transactions, REITs subscriptions, and project cooperation. We believe Vanke H will return to a healthy development path. We maintain our 2024-2026 earnings per share forecast of RMB 0.743, RMB 0.818, and RMB 0.651, respectively. We maintain a target price of HK$10.00, corresponding to 12.4 times the 2024 price-earnings ratio and 0.4 times the 2024 net price-earnings ratio.

The results for the first half of 2024 were broadly in line with expectations. The company's revenue for the first half of 2024 fell 28.9% year over year to RMB 142.78 billion. At the same time, the company recorded a net shareholder loss of RMB 9.85 billion, a year-on-year decrease of 199.8%, slightly lower than the profit warning previously announced. The large losses recorded in the first half of 2024 were mainly due to the following reasons: 1) a sharp drop in delivery area, leading to a drop in revenue from real estate development; 2) gross margin pressure, with gross margin falling 12.1 percentage points to 6.76% year over year; 3) calculation of large impairment losses due to weak real estate markets; and 4) losses due to major transactions and equity transfers to allow for a faster return of capital.

Ensuring delivery and financial security remains the company's focus. Most land plots acquired before 2022 will enter the revenue recognition period, which will put pressure on the company's profit margins. On the other hand, we think guaranteed delivery will help the company get through this period faster. Management said that judging from real estate sales of land acquired after 2022, the average gross margin was around 18%. Furthermore, speeding up asset disposal and issuing REITs remains the company's main task in the second half of this year. Currently, the company's logistics and warehousing REITs have been accepted by the China Securities Regulatory Commission, and affordable rental housing REITs have also been submitted to local development and reform commissions for approval. We believe these asset revitalization measures will help the company's long-term development.

Catalysts: 1) Improved sales performance due to policy relaxation; 2) access to more high-quality land in the short term; 3) more asset disposal at reasonable prices. The main downside risks include: 1) slow release of management dividends; 2) a sharp slowdown in development business; and 3) greater than expected depreciation of development projects.