We expect a 25% year-on-year increase in core net profit in 2020
We expect Hejing Taifu Group's core net profit to increase 25% year-on-year to 6.5 billion yuan in 2020, mainly considering the steady increase in consolidated equity revenue (+25% compared to the same period), while the consolidated gross margin of equity is stable at 32-33% (31.8% in 2019). We expect the payout ratio to remain 40-45%, corresponding to the annual dividend yield of 7.9-8.9%, and the land acquisition is more disciplined. The company will acquire 3.3 million square meters of land in 2020 (corresponding to the addition of land reserves of 60 billion yuan), and the location layout is good. Of these, 55% is in the Yangtze River Delta, 28% in the Greater Bay Area, overall Gross margin exceeds 30%. We expect the land storage value coverage factor to shrink to about 3 times by the end of 2020, but it is still at a reasonable level. We expect the transformation of urban renewal projects to accelerate (expected to supply 10 billion yuan and 30 billion yuan respectively in 2021 and 2022), which is expected to help the company reclaim land more calmly.
The financial situation is sound. Considering that land acquisition costs in 2020 were more cautious (land acquisition costs accounted for 23% of sales), we expect the company's financial situation to remain “yellow” at the end of the year, with the net debt ratio remaining flat at 75%; it is expected that the short-term cash loan ratio will be more than 2 times, and the withholding debt ratio will drop to around 75%.
Furthermore, we expect the average financing cost to stabilize at 6.3-6.4%
Key points of interest
Sales growth was steady, and the quality of growth was excellent. Sales increased 20% to 103.6 billion yuan in 2020. The company plans to supply 20-210 billion yuan in 2021 (up 20% year-on-year), and the sales target growth rate is 20%. In terms of quality indicators, the gross profit margin for 2020 was 32-33%, and the equity ratio stabilized at 62-63%. We expect the indicators to remain steady over the next few years, mainly due to the high quality of land storage (gross profit ratio 30-35%, equity ratio 65%), and the transformation of urban renewal projects is accelerating.
Profit growth is highly visible in the next few years. We expect profit growth of around 20% in 2021, and high double-digit growth in 2022, mainly considering that sales have not been settled (65 billion yuan) and gross margin reached 30-35%, laying a solid foundation for future growth. At the same time, sustainable sales growth and steady profit margins will further enhance profit visibility.
Valuation and advice
We lowered our 2020 and 2021 profit forecasts by 4% and 8% to 6.5 billion yuan (up 25% year on year) and 7.8 billion yuan (up 20% year on year), mainly considering delivery schedule adjustments. Maintaining the outperforming industry rating (mainly considering that the company is a high-quality developer in the Greater Bay Area and Yangtze River Delta region, we are optimistic about the company's growth prospects compared to other medium-sized housing enterprises), and lowered the target price by 10% to HK$15.51, corresponding to 5.3 times the 2021 price-earnings ratio and 33% upward space (mainly based on profit forecast adjustments and physical distribution of property management through physical distribution). The current valuation is defensive , traded at a price-earnings ratio of 4.2 times 2021 and a 31% NAV discount.
risks
Housing policies have been tightened beyond expectations.