Investment suggestion
We downgraded time China from "outperforming industry" to "neutral", lowered its core net profit forecast for 2021 by 15% to 5.2 billion yuan (up 4% year-on-year), and introduced a 2022 profit forecast of 5.9 billion yuan (14% year-on-year growth). Cut the target price by 17% to HK $11.88 (corresponding to 3.8x 2021 price-to-earnings ratio, 10% upside). The reasons are as follows:
The 2020 epidemic dragged down residential delivery, causing core net profit to fall below market expectations (down 9 per cent to 4.96 billion yuan compared with the same period last year). Looking ahead, the company's leading position in urban renewal in the Greater Bay area remains solid, but the progress of transformation may be slower than market expectations, and we expect sales and earnings performance to remain weak in 2021 and may accelerate from 2022.
The leading position of urban renewal in the Greater Bay area is solid, but the boost to sales and profits from the old reform is expected to be more obvious in and after 2022. By the end of 2020, the confirmed land storage had shrunk slightly by 6 per cent to 2159 million square meters, of which the old reform contributed about 30 per cent. At present, the company has locked in about 1.2 trillion of the old replacement value, and plans to gradually transform it in the next 6-7 years.
Among them, we expect that the value of goods landed in 2021 will be about 80 billion yuan, and may be further increased in 2022. Combined with the housing development cycle, we believe that the boost effect of the old reform on the company's sales and carryover may be more obvious in and after 2022; the performance is expected to increase steadily at a low base in 2021 and will accelerate significantly in 2022.
The core net profit in 2020 decreased by 9% compared with the same period last year, of which the settlement income decreased by 16% compared with the same period last year, and the gross profit margin was only 21%. However, the profit contributed by the old reform doubles (1.94 billion yuan) and the disposal income of the Hongwei village project (850 million yuan) complements the profit. We expect that housing income will increase by about 20% in 2021, the gross profit margin will be kept at around 21%, and the urban renewal profit will be generally stable, but the profit and loss of minority shareholders may increase and erode the return profit, so we estimate that the core net profit will increase steadily. Looking at 2022, we think that settlement income will still record an increase of about 20%, and the corresponding gross profit margin will rise to about 26%. With the continued efforts of the old reform, we expect the core net profit to increase by 14% to 5.9 billion yuan compared with the same period last year.
The pre-debt ratio has increased, but the overall financial risk can be controlled. Despite cautious land acquisition in 2020, continued investment in old reforms led to a 4 percentage point increase in the pre-debt ratio to 79 per cent. Thanks to the improvement in the duration of interest-bearing liabilities, the cash-to-short debt ratio has increased to 2 times from 1.5 times at the end of 2019, while the net debt ratio has stabilized at 68%, so the company is still in the "yellow file" of "three red lines" at the end of 2020.
What is the biggest difference between us and the market? We believe that the support of the old reform to short-term financial performance may be weaker than market expectations.
Potential catalyst: sales and earnings performance in 2021 is weaker than market expectations.
Profit forecast and valuation
It currently trades at 3.5 times 21-year earnings, with dividend yields of 8.6% and 9.8% for 21-22 years.
Risk.
The company's delivery progress in 2021 exceeded our expectations.