Contract sales from January to July reflect a modest recovery in sales. The company's contract sales growth bottomed out after March 2020. From January to July 2020, contract sales increased 4.2 per cent year-on-year to 72.5 billion yuan, reaching 47.1 per cent of the annual sales target. In the first half of 2020, contract sales from first-and second-tier cities accounted for more than 88 per cent, while the overall removal rate and cash recovery rate reached 68 per cent and 81 per cent, respectively.

We expect the removal rate to be healthy by 2020. It is estimated that the value of the push order will reach 130 billion yuan in the second half of 2020, equivalent to 72% of the target removal rate to achieve the annual sales target. The company's 2020 contract sales target is more realistic and less aggressive than in previous years. We expect the removal rate to remain at a healthy level of 70% in 2020.

Results in the first half of 2020 were worse than expected. Total revenue fell 20.9% year-on-year to 21.066 billion yuan. Gross profit margin fell 9.0 percentage points year-on-year to 14.9%. Net profit for shareholders fell 54.1 per cent year-on-year to 908 million yuan. The net profit of core shareholders fell 44.8 per cent year-on-year to 1.062 billion yuan. We believe that the decline in gross profit margin is related to the centralized delivery of projects with higher land goods acquired between the second half of 2016 and 2017.

We lowered our NAV valuation and earnings forecast to reflect weaker-than-expected profit margins. We lowered the company's target price to HK $9.00, a 60% discount to the company's 2020 valuation of HK $22.49 per share, 5.3 times 2020 core price-to-earnings ratio and 0.8 times 2020 market-to-net ratio, respectively. Downgrade investment rating to "collection". Risk factors: lower-than-expected contract sales and tighter industry policies.