The third quarter results were basically in line with our expectations

The company released 1-3Q24 results: 1) The company's settlement resources were large in the third quarter, and revenue increased 29% year on year, driving the year-on-year decline in the first three quarters (41 billion yuan) to narrow to -22% (1H24 -41%); 2) gross margin before tax slightly increased to 12.6% (1-3Q23 17.1%) compared to 1H24 in the first three quarters; 3) The scale of the company's incremental asset and credit impairment in the first three quarters was small, with a cumulative total of 3.35 billion yuan (1-3Q23 1.46 billion yuan); 4) The parent loss was recorded at 3.41 billion yuan (1-3Q23 +0.06 billion yuan), implying break-even for the third quarter, which is basically in line with our expectations.

Development trends

Since the beginning of the year, the operating side has maintained a net cash inflow, and is optimistic about the smooth payment of subsequent public bonds. By the end of 3Q24, the company's cumulative net operating cash flow inflow was 7.8 billion yuan (1H24 +4.6 billion yuan), better than the first three quarters of last year (-0.75 billion yuan); during the same period, due to insufficient new projects, the cumulative sales volume of the company's contracted sales fell 57% year on year to 52.8 billion yuan, which is significantly weaker than the Top100 (-39%); comprehensive analysis shows that the company's housing development business team has strong capital turnover and operation capabilities to support the payment of subsequent debts as scheduled.

As of the end of 9M24, the total face value of the company's domestic public bonds to be paid was 7.4 billion yuan, in order of 2024.11/2024.12/2025.2/2025.4/2025.7/2026.4 (that is, calculated based on 100% early redemption) of 15/15/17/0.5/1.7/0.5 billion yuan, that is, the peak of payment pressure has passed, and the subsequent pace has eased. Furthermore, group-level cash on book remained stable at 22.7 billion yuan at the end of the first half of the year, and the short-term cash debt ratio was 0.62 (0.56 at the end of 1H24), maintaining the yellow level. Looking ahead, we expect that the company's annual sales may exceed 70 billion yuan, further contributing incremental capital to the Group; if supply-side financing policies continue to be positive, we judge that the certainty of debt payment will continue to increase, and we are optimistic that subsequent complete financial relief will boost the valuation side.

It will take time to resume normal investment and development activities, and performance may continue to be relieved this year and next two years. Since August 2023, the company has not obtained any additional land savings to fully cope with public debt payments; we believe that the current residential land market has few high-quality resources and intense competition. Coupled with the company's debt repayment pressure, it will still take time to return to a normal pace of land acquisition. In terms of performance, due to the volume of resources that can be settled, we expect the revenue side to maintain an annualized decline of more than 20% in 2024-2025; in recent years, sales resources have been dominated by low-quality, obsolete inventory, and profit margins may be difficult to improve, and losses will be relieved to accelerate the removal of land storage burdens.

Profit forecasting and valuation

We kept our profit forecast unchanged, corresponding to net profit due to mother in 2024/2025 to a loss of 4.8 billion yuan and a loss of 5.5 billion yuan. The current share price is trading at 0.42x/0.47x in 2024/2025 P/B multiples. We maintain the company's neutral investment rating and target price of 6.55 yuan/share, corresponding to the 2024/2025 P/B ratio of 0.49x/0.56x, with 18% upside compared to the current stock price.

risks

The decline in the company's debt repayment capacity exceeded expectations, operation-side sales performance fell short of expectations, and the supply-side financing support policy of the industry fell short of expectations.