Core net profit in the first half of 2021 is forecast to decline by 8% year on year
We expect the Olympic Garden's revenue to grow by 10-15% in the first half of the year compared with the same period last year, and in terms of profit, although the transformation of the old reform project in Foshan is expected to bring a first-level development profit of 400-500 million yuan after tax in the first half of the year, however, the reported gross profit is expected to decline by about 4% (to 25%) compared with the same period last year.
Balance sheet repair is beginning to bear fruit. According to the requirements of the "three red lines", the Olympic Park's pre-debt ratio at the end of 2020 does not meet the standard (78%) and is in a "yellow file", so the company will reduce leverage as its primary goal in the next three years. specific measures include strict control of investment intensity, land acquisition intensity controlled within 25%, reducing the scale of interest-bearing liabilities by more than 5% a year, and improving the efficiency of money recovery. The company actively implemented this strategy in the first half of the year, thanks to its restraint in land ownership, a slight reduction in interest-bearing liabilities and a healthy refund rate of 85-90%. We expect its net debt ratio and pre-debt ratio to be marginally lower in the medium term than at the end of 2020 (83% and 79% at the end of last year). We expect the absolute value of minority equity in the medium term to be generally stable compared with the end of last year, implying that its share of total equity has declined. In addition, we expect average financing costs to be basically stable compared with 7.2% at the end of last year.
Urban renewal is progressing steadily. By the end of 2020, the total reserve value of the company's old projects is 673 billion yuan, and the gross profit margin is 35-40%. We believe that the accelerated transformation of old projects in the next few years (the converted value in 2021-23 is 40 billion yuan, 52 billion yuan and 68 billion yuan respectively) will bring a quantitative and qualitative boost to the company's profits. In the first half of the year, the company's Cuiwei Village project achieved the first batch of transformation, we expect to bring a value of about 3.5 billion yuan, is expected to be launched in the third quarter of this year.
Pay attention to the main points
It is expected that the annual sales target of 150 billion yuan (an increase of 13% over the same period last year) can be achieved smoothly. The company plans to supply 220 billion yuan in 2021 (an increase of 12% over the same period last year), with a distribution of about 44:56 in the last half of the year. In the first half of the year, the company's sales rose 33% year-on-year to 67.6 billion yuan, 45% of the target. On the other hand, the impact of upgrading the urban structure of new land last year is also gradually emerging, with the company's average sales price rising 9% in the first half of the year compared with 2020. In addition, we estimate that the quality of sales in the first half of the year is generally stable, with a gross profit margin of about 26% (26-279% last year) and an equity ratio of about 73% (about 74% last year).
Valuation and suggestion
Maintain earnings forecasts and neutral ratings. In view of the recent heightened investor concerns about the financial side of real estate companies, we have lowered our target price by 25% to HK $7.54 (3 times 2021 price-to-earnings ratio and 37% upside). The company is currently trading at 2.2x and 1.9x 2021-22 P / E, corresponding to dividend yields of 16.5% and 18.90% risk.
Sales and delivery performance in 2021 exceeded our expectations.