Performance summary: 1) Steady growth in earnings: In 2020, the company achieved operating income of 36.13 billion yuan, an increase of 10.9% over the previous year; the company achieved net profit of 2.65 billion yuan to the mother, an increase of 5.8% over the previous year. 2) The balance sheet continued to improve: the net debt ratio fell further to 64.7%, the short-term debt ratio fell from 34.2% to 29.1%, and the ratio of short-term cash debt increased to 2.20; the share of non-bank loans fell to 6%; year-end contract debt increased sharply by 57% to 60.9 billion, and future revenue was highly certain; 3) Operational efficiency improvement: During the reporting period, the average initial opening time of the company's new projects was 7 months, and the average initial opening rate reached 70%.
Adhering to the core metropolitan area layout, sales have grown steadily, and the equity ratio has improved. In 2020, the company achieved contract sales of 141.9 billion yuan, an increase of 8.6% over the previous year, and the equity sales ratio was about 55%. The contract sales area was 8.9 million square meters, an increase of 5.5% over the previous year. The average contract price was 15,949 yuan/square meter. Zhengrong Real Estate adheres to the core metropolitan area layout. In terms of contract sales area distribution, the Yangtze River Delta region and the West Bank of the Strait account for 38.6% and 33.2%, with a total contribution of over 70%. In 2021, management expects to achieve the sales target of 150 billion dollars, while also anticipating a further increase in the sales equity ratio to 60%.
Adhere to deep regional cultivation and optimize the land storage layout. During the reporting period, the company added 46 new land storage blocks, with an estimated construction area of 7.14 million square meters. The equity ratio of the new land was 70.0%. By the end of 2020, the company's total land reserves reached 28.45 million, with a value of about 500 billion yuan, which can be developed in the next 2-3 years. The company continues to implement the “1+6+X” strategy and is deeply involved in the regional and national layout. Looking at the regions where new land storage is located, 77% come from first-tier and second-tier cities with good fundamentals, 43% are located in the Yangtze River Delta region, and 31% are located on the west bank of the Strait. The company continues to increase the Yangtze River Delta region based on a strategy of deepening regional cultivation.
The cost of financing has been reduced, and the reduction in leverage has had remarkable results. The company's comprehensive financing cost in 2020 was 6.5%, down 1pp from 2019. Through diversified financing channels such as priority notes, dim sum bonds, permanent capital securities, syndicates, and ABS, the company successfully optimized its debt structure. The proportion of high-cost non-bank loans dropped from 20% to 6%, and the share of low-cost traditional bank loans increased from 42% to 56%. In terms of the three red lines, the company's balance ratio index has yet to meet the standards after excluding advance receipts. Management expects the full fall to the green range in 2022. The net debt ratio fell further to 64.7%, the short-term debt ratio fell from 34.2% to 29.1%, and the short-term cash debt ratio increased to 2.20. Management said it will seek an increase in credit ratings within the year.
Profit forecasts and ratings. The company's EPS for 21/22/23 is expected to be RMB 0.66/0.70/0.74, respectively.
Considering the high quality of the company's future land storage structure and significant optimization of its debt structure, we maintain the “hold” rating.
Risk warning: sales payback falls short of expectations; policy regulation risks; gross margin continues to decline.