We believe the company's business model has been further optimized because 1) Strategically, the company will focus more on the Yangtze River Delta region and the Chengdu/Chongqing region rather than expand nationwide, which can bring regional and operational advantages. 2) On the operational side, the company focuses on acquiring small plots of land with a construction area of less than 200,000 square meters to take advantage of its high-speed asset conversion model and quickly achieve cash flow balance. 3) Maintain a relatively short 2-2.5 year land reserve life to balance the balance sheet. As a result, we think this will drive sustainable sales growth (30% year-over-year increase in 2021) and future profit recovery. As for 2021, management directed revenue and profit growth of 15-20%, with gross margin in the range of 21-22%, after minority shareholders' equity fell short of expectations in 2020. Maintain the buy rating.
The transition from 1+5+X to 1+1+X will lead to a sustainable return to profitability and a better asset turnover model.
We appreciate the management's critical strategic shift from a national expansion to a focus on the Yangtze River Delta and the Chengdu/Chongqing region. First, the market size of the two regions can support the company's sales path of 50 billion to 100 billion yuan.
Second, since most land is supplied through public channels, high asset turnover models can work and be optimized. This would fit into the company's main strengths. Finally, due to operating levers such as general sales and management expenses and financing costs, the deep strategy will also support the restoration of the company's profitability.
Land reserves — Chengdu became the center of expansion. In 2020, the company has purchased 22 plots with a total construction area of 2.8 million square meters (RMB 16 billion). Four plots of land were purchased in Chengdu, accounting for 18% of the total, second only to its base, Wenzhou. This raised the Chengdu/Chongqing share to 13% of 6.7 million land reserves, which will be a good diversified product due to strong demand. The Yangtze River Delta will continue to be the focus and contribute 80% of land reserves.
Sales are likely to reach RMB 40 billion in 2021 (up 30% year over year). After achieving a 44% increase in sales to 30.3 billion yuan in 2020, the company set a target of 36 billion yuan for 2021 (up 18% year over year). We think this target is a bit conservative, considering 1) the company has prepared 65 billion yuan of saleable resources, 80% of which comes from new projects/new stages. A sales rate of 55% will meet the target, compared to 70% in 2020. 2) First-quarter sales increased 256% year-on-year to 10.8 billion yuan, accounting for 30% of the annual target. 3) 80% of saleable resources are located in the Yangtze River Delta region. As a result, we think the company may exceed its 2021 $40 billion guideline. However, since the ratio of land acquisitions and reserves is similar, the ratio of sales attributable to parent companies is likely to remain at 45% (2020 level).
Maintain buy ratings: We maintain profit forecasts and target prices unchanged.
2020 results: The balance sheet was upgraded to the green category, but fell short of expectations due to minority shareholders' equity: due to rapid sales growth in 2017/18, the company's revenue increased 24% year over year to RMB 9.2 billion. Gross margin fell 2 percentage points year over year to 21%, in line with industry trends. Net profit (before deducting minority shareholders' equity) increased 19% year over year to 7.2 billion yuan, but the rapid increase in minority shareholders' equity weakened the company's profit of 339 million yuan (down 34% year over year). The company announced a dividend of RMB 0.08 per share for the full year of 2020 (dividend rate 20%). On the balance sheet side, the company met all the “three red lines” requirements, with a net debt ratio of 50%, cash/short-term debt 1.4 times, and debts/assets (excluding pre-sales) of 68.6%.