Investment suggestion
We downgraded Rong Sheng Development from outperforming the industry to neutral for the following reasons:
The lower-than-expected settlement progress and profit margin in 2020 will lead to a decline in performance, and the uncertainty of future performance growth is high. The company's operating income in 2020 was 71.5 billion yuan, an increase of 0.8% over the same period last year. The low growth rate was mainly due to the completion of the project for the whole year was only 78%, the carry-over area / amount decreased by 2%, respectively, to 62.1 billion yuan / 6.01 million square meters, the comprehensive after-tax gross profit decreased by 9% to 23.9%, and the net profit of homecoming decreased by 17.8% to 7.5 billion yuan, which was lower than we had expected. We expect that the company's settlement gross profit margin will continue to decline, and the growth rate of performance will be under pressure this year and next year. The company plans to pay a dividend of 0.35 yuan per share in 2020, and the dividend rate will be reduced to 20.3% (22.9% in 2019, 25.9% in 2018).
The soil storage margin and quality need to be improved. At the end of 2020, the company's total soil storage was 3836 million square meters, down 5% from the end of 1H20; 72% of them were located in third-tier cities, the area around the Bohai Sea accounted for more than 50%, and the regional and energy level structure was sinking. The land area / amount of land taken by the company in 2020 was 7.15 million square meters / 28.2 billion yuan, down 27 percent from the same period last year, and the average floor price increased 28 percent to 3941 yuan per square meter. The new projects are mainly distributed in Beijing, Tianjin, Hebei and the Yangtze River Delta (accounting for 69 percent of the total). We expect that tighter regulation and control policies in hot cities may affect project profit margins and suppress follow-up performance. We believe that the company's current soil reserve margin and quality need to be improved, but limited to the leverage reduction target, it is difficult to improve in the future.
The sales target for 2021 is basically the same as that for 2020, and the growth rate of subsequent sales is expected to be weak.
In 2020, the company's sales increased by 10% year-on-year to 127.1 billion yuan, the sales area increased by 7% year-on-year to 1174 million square meters, and the corresponding average sales price increased by 3% to 10822 yuan per square meter. The company plans to achieve a contract amount of 130 billion yuan in 2021, corresponding to a year-on-year growth rate of 2%. We estimate that the company's current soil storage cover ratio is less than two years, and the land supply pressure is greater, the future sales growth may continue to be weak.
Financial indicators are under pressure, and it is difficult to improve the leverage side. At the end of the period, the company's net debt ratio rose to 80.2%, the pre-asset-liability ratio rose to 73.8%, and the cash-to-short debt ratio was 1.2. in 2020, the net operating cash flow decreased by 36% to 1.4 billion yuan compared with the same period last year, while interest-bearing liabilities increased by 11% to 73.1 billion yuan compared with the same period last year. We judge that the balance between the land reserve margin, the steady growth of sales and the improvement of financial indicators will pose a greater challenge to the company's operation, and it is difficult for financial indicators to "turn green" in the short term.
What is the biggest difference between us and the market? Our judgment on the prospects for improvement in the company's soil reserves and financial side is weaker than the market expected.
Potential catalysts: better-than-expected deterioration of financial indicators; weak sales growth and performance growth.
Profit forecast and valuation
Taking into account the company's weak earnings growth and financial pressure, we lowered the 2021 earnings forecast by 32% to 1.69 yuan per share, and introduced the 2022 profit forecast of 1.73 yuan per share. The company's current share price trades at 3.7amp 3.6 times 2021xx 2022 earnings, lowering its target price by 30% to 6.75 yuan (mainly because of weak sales earnings growth and the new "three red lines" rules put pressure on the company's debt side). The new target price corresponds to 4.0amp 3.9 times 20211x2022 price-to-earnings ratio and 10% upside.
Risk
The financing environment is looser than expected; the regulation and control policies of the main cities are loosened than expected.