Preannouncement: 1H24 net loss estimated at Rmb7-9bn

Vanke preannounced its 1H24 results, estimating that it suffered a net loss attributable to shareholders of Rmb7-9bn (vs. a profit of Rmb9.87bn in 1H23). Excluding nonrecurring items, the firm estimates that it suffered a net loss attributable to shareholders of Rmb5-6.5bn (vs. a profit of Rmb8.7bn in 1H23). The firm's preannounced 1H24 results missed our expectations, mainly due to falling gross margin and higher-than-expected asset impairment loss provisions.

Trends to watch

Earnings under pressure due to falling gross margin of settled projects, asset impairment loss provisions, and losses from asset transactions. In 1H24, the firm's net profit attributable to shareholders and net profit excluding nonrecurring items both suffered heavy losses, mainly due to four factors. First, land acquisition costs for settled projects were relatively high in 1H24, and the firm accelerated the reduction of inventories by offering discounts to customers amid a downward trend in sales, putting pressure on the gross margin of settled projects. Second, as prices of inventories are falling and it takes longer to sell inventories, the firm made asset impairment loss provisions for some projects. Third, some of the firm's asset and equity transactions were lower than the book value in 1H24, resulting in asset disposal losses. Fourth, some of the firm's non- core financial investments suffered losses.

Taking various measures for operations; focusing on cash flows. In 1H24, the firm's "all-inclusive" sales fell 38% YoY to Rmb127.3bn with cash collected from sales at Rmb118.6bn. The firm's sales of completed new homes exceeded Rmb24bn and its sales of parking spaces, commercial properties, and office buildings exceeded Rmb15bn, improving the structure of its inventories. In 1H24, the firm disposed of various assets and completed the issuance and IPO of a REIT with total proceeds from them exceeding Rmb9bn. The firm's current efforts to develop businesses mainly focus on ensuring cash flows, and we believe the firm will continue to reduce inventories of completed homes and make progress in asset and equity disposal.

Striving to transform financing methods; a net inflow of funds from borrowings in 1H24. In 1H24, the firm's newly added borrowings and renewed borrowings totaled more than Rmb60bn (including Rmb14.9bn of new loans with business-purpose properties pledged as collateral, Rmb20bn of loans from a bank consortium led by China Merchants Bank, and some borrowings from Bank of Communications), resulting in a net inflow of about Rmb9bn of funds in the firm's consolidated financial statements. Looking ahead, the firm no longer has overseas debts that are set to mature in 2024, and it has two domestic debt obligations (Rmb4.3bn in total) that need to be repaid. We expect the firm to ensure its repayment of debts through methods such as collecting cash from operations and borrowing from a consortium of banks.

Major employees plan to use Rmb200mn of their own funds to increase holdings of shares in the firm. The firm has announced that its major employees plan to increase holdings of the firm's shares. A total of 1,862 management employees plan to use Rmb200mn of their own funds to increase their holdings of the firm's A-shares through a trust program over a period of six months. Among these employees, 15 board directors, supervisors, and senior executives plan to spend no less than Rmb73mn to increase their holdings of shares.

According to plan, employees shall not purchase the firm's shares to increase their holdings of shares at a fixed price, the shares to be purchased must not be traded within two years, and buyers of the shares shall be responsible for their own profits or losses. We believe that management employees' plan to increase their holdings of shares in the firm shows their confidence in the firm's resumption of healthy growth and their emphasis on the firm's performance in the capital market. In addition, we think the closer ties between the firm and its major employees could facilitate its implementation of a package of measures to optimize assets and drive healthy growth.

Financials and valuation

We cut our 2024 and 2025 earnings forecasts from Rmb9.4bn and Rmb9.4bn to -Rmb6bn and -Rmb2bn, as revenue recognition of the firm's settled projects and its profits may be under pressure, and asset impairment loss provisions and asset disposal losses may also weigh on its earnings. As the firm may suffer a loss, we shift from the P/E valuation method to the P/B valuation method. The stock is trading at 0.3x 2024e and 0.3x 2025e P/B. We maintain an OUTPERFORM rating. Given our earnings forecast revisions and potential replenishment of holdings of the firm's shares after its financial risks ease, we cut our TP by 29% to Rmb8.0, implying 0.4x 2024e and 0.4x 2025e P/B, offering 19% upside.

Risks

Disappointing new borrowings and/or sales recovery; sharper-than- expected decline in profit margins.