Kaisa's revenue rose 16.1 per cent year-on-year in 2020, its gross profit margin was 28.5 per cent higher than the same period last year, and operating profit rose 19.8 per cent year-on-year. We estimate that Kaisa's recurrent core net profit rose 6 per cent year-on-year to 3.9 billion yuan. The structure of assets and liabilities has been continuously optimized, the net leverage ratio has continued to improve, and two of the three indicators of the new financing rules have been met. The company aims to achieve 130 billion yuan in sales by 2021, an increase of 21.6% over the same period last year, and the growth rate is higher than the average level of the industry. We continue to be optimistic about the long-term development of the company, maintain the buy rating, and adjust the target price to HK $5.0 per share to reflect the potential beach-thin effect of the rights issue.
Report content
The gross profit margin remains at a high level. Kaisa's revenue rose 16.1 per cent year-on-year to 55.77 billion yuan in 2020, gross profit rose 15.1 per cent to 15.9 billion yuan, and gross profit margin fell slightly by 0.3 per cent to 28.5 per cent, maintaining a high level in the industry. Operating profit rose 19.8 per cent year-on-year to 10.16 billion yuan, while net profit rose 18.6 per cent to 5.45 billion yuan. After deducting one-time gains or losses such as changes in the fair value of investment properties, gains from the sale of shares in the project company, and write-offs of inventory and other assets, we estimate that Kaisa's recurrent core net profit rose 6 per cent year-on-year to 3.9 billion yuan, while the core net interest rate fell 0.7 percentage points to 7 per cent. We believe that the decline in core net interest rates is mainly due to a 13% year-on-year decline in capitalized interest rates.
The net leverage ratio declined. By the end of 2020, Kaisa had total assets of about 309.9 billion yuan and total debt of about 231.1 billion yuan. After deducting contractual liabilities from customers, the liability-to-asset ratio was about 70.3%, slightly higher than the required 70%.
The cash is about 47.1 billion yuan, the short-term debt is about 23.1 billion yuan, and the cash-to-debt ratio is about 204% (if the restricted cash ratio is 156%), which is better than the prescribed 100%. The total interest-bearing liabilities and net debts are 122.8 billion yuan and 75.7 billion yuan respectively, the total capital is about 77.4 billion yuan, and the net leverage ratio is about 98%, which is lower than the required 100%.
Sales growth remains strong. Kaisa's equity sales rose 21.3% to 106.9 billion yuan in 2020 compared with the same period last year. Kaisa rose from 27th in 2019 to 24th in 2020, according to Carey data. The company aims to achieve 130 billion yuan in sales by 2021, an increase of 21.6% over the same period last year, and the growth rate is higher than the average level of the industry. Good sales mainly benefit from the company's abundant land storage. By the end of 2020, the land storage area was about 2875 million square meters, with a value of about 670 billion yuan, accounting for about half of the first-tier cities. More than 200 old reform projects are under way, of which 4.2 million square meters are expected to be converted into soil storage in 2021-22, with a value of about 200 billion yuan.
The advantages of the old reform are highlighted. After years of efforts and advantages in old projects (especially in Shenzhen), Kaisa's balance sheet has improved significantly, with the net leverage ratio falling from 308% in 2016 to 98% in 2020. The company aims to meet the three new financing regulations by the end of 2021, and the average financing cost for the year has dropped by 1 percentage point, reflecting the company's good execution. In addition, Kaisa's rich old reform resources provide it with a stable source of soil storage, and about 30% of the new land reserves in 2020 come from the old reform, which has a comparative advantage under the policy of two sets of land supply. We continue to be optimistic about the long-term development of the company and maintain our buy rating. After the results announcement, the company proposed to raise a maximum of about 2.7 billion yuan (HK $2.95 per share) in the form of seven shares per share. After the rights issue, the capital can be expanded to further optimize the asset structure. Taking into account the potential beach effect of the rights issue, the target price was adjusted to HK $5.0 per share.
Risk hints: real estate regulation and control policies, economic downturn on sales pressure, stock supply beach thin effect.