Recent situation of the company
The company's share price has risen about 10% since its low in mid-May. The reason behind this is that in addition to the improvement in mood and the emergence of better buying points in the near mid-year sector, the company was included in the HSI high dividend yield index on May 21 (effective June 7). It also gives the company an extra emotional boost.
Comment
The landing of urban renewal has been gradually accelerated. At present, the company has locked in the value of old and modified goods of about 1.1 trillion yuan. Among them, we expect to land more than 10 projects this year, with a value of about 80 billion yuan, and is expected to speed up further next year. Considering the high gross profit margin of the old projects (the old village projects are usually higher than 30%), we think that the accelerated transformation can bring both quantity and quality boost to the company's soil reserves. At present, the old reform projects account for 30% of the confirmed land reserves, and the company expects to increase to more than 40% in the future. In addition, we estimate that the old reform will contribute about 2 billion yuan to the first-tier net profit each year in 2021-23 (roughly the same as in 2020), providing a solid support for profits.
The sales growth is steady and the quality margin is improved. According to Carey statistics, from January to May, the company's sales increased 52% to 37.3 billion yuan compared with the same period last year, and has achieved 34% of the annual target of 110 billion yuan. In view of the abundant volume in the second half of the year (the new goods are about 96 billion yuan), we think that the target for the whole year can be achieved smoothly. In terms of sales quality, thanks to the high prosperity of the real estate market in Dawan area since the beginning of the year and some price increases for some of the company's projects, we estimate that the gross profit margin on sales has steadily increased compared with last year (24-26%), and the equity ratio has been maintained at about 65%. The financial situation has improved steadily. The company plans to enter the "green file" by the end of 2022, mainly through two paths: carefully acquiring land (the intensity of land acquisition is controlled at 40% this year) and controlling the size of interest-bearing liabilities (the target is to decline steadily over the next three years). Besides. We expect the average financing cost to fall to about 7 per cent by the end of this year from 7.3 per cent at the end of last year, mainly due to lower refinancing costs, such as the coupon of 5.55 per cent on the new three-year $400 million bond issued in May, which is 2 percentage points lower than the corresponding swapped dollar bond.
This year's results are expected to remain headwinds, accelerating from 2022. Taking into account the relatively limited contribution of the old acquisition project to the residential carry-over this year, and the profit and loss of minority shareholders or the suppression of homing profit performance, we expect the full-year residential development gross profit margin to be close to 21% last year, and core net profit growth in low single digits. Looking ahead to 2022, we expect the gross profit margin of residential development to return to 25-26%, leading to double-digit profit growth.
Valuation proposal
Maintaining the profit forecast, the profit this year and next year is expected to increase by 4% and 14% to 5.2 billion yuan and 5.9 billion yuan respectively. Taking into account the company's heavy position in the Great Bay area, solid moat and continuous financial improvement, we believe that there is still support for long-term growth prospects, but subject to residential clearing shop arrangement, we expect this year's results to remain headwind and maintain a neutral rating for the time being. Raise the target price by 4% to HK $12.39 (4 times 2021 price-to-earnings ratio, 16% upside), based on improved sentiment in the sector. The company is currently trading at 3.4 times 2021 earnings, with dividend yields of 8.7% and 10.0% this year and next.
Risk
The housing purchase policy in the Greater Bay area tightened more than expected; the progress of the transformation of the old reform was not as expected.