Investment advice
We downgraded Huaxia Happiness Investment's rating from outperforming the industry to neutral, and lowered the target price by 32% to 11.09 yuan, corresponding to 3.0/2.7 times the 2021/2022 price-earnings ratio and 7% downside. The reasons are as follows:
The new “three red lines” regulations put pressure on the company's debt side. As of the end of the third quarter of 2020, the company's interest-bearing debt reached 218.5 billion yuan, corresponding to a net debt ratio of 214%, and a balance ratio of 78% excluding advance receipts. It is a red-grade housing enterprise under the “three red lines” rule. In our recently released report “Seeing the Sun, Removing the False and Storing the Truth: Counting the “Three Red Lines”, we estimated how 26 sample housing enterprises met the standards.
The results show that in order to achieve the downgrade target, the intensity of land acquisition for Huaxia Happiness will decline in the coming years, and the land storage coverage ratio will remain at around 1.3 times. At the same time, there are shortcomings in the quality and quantity of the company's stock of soil storage. We estimate that the company's current unsold value of about 130 billion yuan, which can only cover sales for the next year or so. Third- and fourth-tier cities account for 75% of the land stock, and the area around Beijing accounts for 52%. The difficulty of decontamination is high, and sales growth may stall together. 1-3Q20 61% decrease). In addition, the company's inventory of residential, commercial projects, and industrial parks still has a large amount of rigid development expenses in the future. We expect that the company's operating cash flow will continue to be under pressure, making it difficult to rectify (in 2019, the company's operating cash outflow was 31.8 billion yuan, 1-3Q20 outflow was 25.1 billion yuan).
Performance is difficult to achieve when gambling, and profit growth is expected to be under pressure. According to the performance-to-performance gambling agreement, the company must achieve net profit of 18 billion yuan to the mother in 2020, and the net profit of the company to the mother fell 25% year-on-year to 7.3 billion yuan in the first three quarters of 2020. We anticipate that it will be difficult for the company to meet the 2020 performance gambling requirements (including real estate settlement revenue of 56 billion yuan, industrial development service revenue of 33.5 billion yuan, and corresponding net profit of 13.2 billion yuan). At the same time, considering the continued decline in prepaid housing payments over the same period last year, the company's future settlement revenue and profit growth will also be under pressure.
What is our biggest difference from the market? Our judgment on the growth of the company's sales and earnings fell short of market expectations.
Potential catalyst: Weak sales and performance growth.
Profit forecasting and valuation
Considering that the company's performance is difficult to complete and sales and profit growth is weak, we lowered our earnings per share forecast for 2020/2021 by 6%/17% to 3.37/3.70 yuan, and introduced a 2022 profit forecast of 4.04 yuan/share. The company's current stock price trading is 3.2/3.0 times the 2021/2022 price-earnings ratio, and the target price was lowered by 32% to 11.09 yuan (mainly due to the weak growth in the company's sales profit and the new “three red lines” regulations putting pressure on the company's debt side). The new target price corresponds to 3.0/2.7 times the price-earnings ratio in 2021/2022 and 7% of the downside.
risks
Financing policies have exceeded expectations and have been relaxed; regulatory policies in major cities have been relaxed.