2020 results are in line with market expectations
Hejing Taifu's consolidated equity revenue in 2020 increased 20% year on year to 46.8 billion yuan, consolidated equity gross margin fell slightly by 0.7 percentage points to 31.1% year on year, and core net profit increased 25% year on year to 6.51 billion yuan, in line with market expectations. The company maintains a payout rate of 45%, and the corresponding dividend rate is 8.3%.
Land storage resource endowments are outstanding, and the leading position in urban renewal in the Greater Bay Area is stable. The company acquired little land in the open market in 2020. Coupled with limited renovation and transformation, the annual value of new goods was 70 billion yuan (sales was 103.6 billion yuan). The scale of land storage was reduced, but the unsold value could still cover about 4 years of sales, and the distribution of land storage in the Greater Bay Area and the Yangtze River Delta was 53% and 17%. The overall land to goods ratio was about 30%, making it competitive. Currently, the company's urban renewal has a locked value of 650 billion yuan, but its contribution to sales may still be limited due to limited conversion progress in the short term (2021-22 will supply 10 billion yuan and 20-30 billion yuan respectively).
The financial situation improved marginally. Due to land acquisition restraint in 2020 (land costs accounted for 23% of sales), and some of the company's joint ventures switched to mergers, driving minority shareholders' equity growth of more than 3 times to 10.7 billion yuan, the withholding debt ratio at the end of the year fell 2.6 percentage points to 75%, the net debt ratio improved 14 percentage points to 62%, and the short-term cash debt ratio was 1.8 times, which is in the “yellow bracket” below the “three red lines”. The company's average financing cost fell slightly by 0.2 percentage points to 6.2% in 2020, leading the way among comparable companies.
Development trends
Sales are expected to continue growing at 20% in 2021. The company plans to supply 205 billion yuan in 2021 (up about 20% year on year), corresponding to sales target of 124 billion yuan (up 20% year on year).
Considering that 83% of the saleable value is in the Greater Bay Area and Yangtze River Delta, and that Tier 1 and 2 cities account for 90%, we expect Dehua to be resilient. The company's gross sales margin stabilized at 30-32% in 2020, and the equity ratio was around 62%. We expect the gross margin to rise slightly in 2021, and the equity ratio to 64-65%.
Commercial real estate continues to gain momentum. The company's overall rental revenue continued to grow positively in 2020 (up 3% year-on-year to 1.45 billion yuan) even after the pandemic disrupted it. The company plans to open 26 shopping malls and 10 office buildings within the next 3 years. If it can be successfully opened, the compound growth rate of rent income in the next 3 years will be about 30%.
Profit forecasting and valuation
The 2021 core net profit forecast was maintained at 7.83 billion yuan (up 20% year on year), and the 2022 profit forecast of 9.16 billion yuan was introduced (up 17% year on year). Considering the company's outstanding endowment of land storage resources and the positive growth in commercial rents, we maintained our outperforming industry rating and raised the target price by 3% to HK$15.96 (5.6 times the price-earnings ratio in 2021, with 20% upside). The company is currently trading 4.6 times the 2021 price-earnings ratio.
risks
The gross margin for land acquisition in the open market declined; the opening of shopping malls and office buildings fell short of expectations.