1H21 performance is lower than we expected.

The company announced 1H21 results: operating revenue was 34.2 billion yuan, up 31% from the same period last year, and net profit was 2.5 billion yuan, down 14% from the same period last year, which was lower than we had expected (down 0-5% from the same period last year), mainly due to a larger-than-expected decline in settlement profit margin.

Settlement profit margin and equity share declined. The company's real estate settlement income during the period rose 39 per cent to 31.6 billion yuan from a year earlier, but the settlement gross margin fell 9.1ppt to 23.3 per cent and after-tax gross margin fell 5.3ppt to 22.3 per cent. The increase in the settlement of cooperative projects during the company period led to a sharp increase in the income of the joint venture to 120 million yuan (1H20 was 3 million yuan), and the profit and loss of minority shareholders increased to 370 million yuan (1H20 was-50 million yuan). As a result, the profit recorded a decline of 14% compared with the same period last year, and the net profit margin of the joint venture decreased 3.9ppt to 7.4%.

Marginal optimization of financial indicators, follow-up improvement can be expected. The slowdown in investment during the period led to the improvement of financial indicators, with operating cash inflows of 1.25 billion yuan (3.9 billion yuan outflow in the same period last year), net debt ratio at the end of the period decreased by 13.7ppt to 66.5% compared with the beginning of the year, asset-liability ratio excluding prepayment decreased by 3.0ppt to 70.8% compared with the beginning of the year, cash short-debt ratio decreased by 1.16 times (1.23 times at the beginning of the year), and interest-bearing liabilities decreased by 7% to 67.9 billion yuan compared with the beginning of the year. We expect that the company will continue to improve its financial indicators through prudent land acquisition, increased rebates and diversified financing, and strive to achieve the "three red lines" targets.

Sales grew steadily in the first half of the year, and the annual amount is expected to be the same as last year. During the period, the company achieved a contract amount of 59.9 billion yuan, an increase of 24% over the same period last year, and the signed area was 5.17 million square meters, an increase of 19% over the same period last year. The company plans to achieve a contract amount of 130 billion yuan (105 billion yuan for sales rebate) for the whole year, corresponding to a year-on-year growth rate of 2%. In the first half of the year, 46% of the annual sales target has been achieved, and we expect the company to achieve its annual target.

Slow down the intensity of land acquisition, pay attention to the rhythm and quality of the follow-up land supply. The amount of land taken by the company in the first half of the year decreased 41% to 12.3 billion yuan compared with the same period last year, and the amount of land acquired by rights and interests decreased by 56% to 8 billion yuan compared with the same period last year. The total amount of land acquired is only 21% of the current sales (1H20 is 43%, 22% for the whole year of 2020). The new land storage floor area decreased by 35% to 3.03 million square meters compared with the same period last year, and the corresponding floor price dropped 9% to 4074 yuan per square meter, which is 32% of the average sales price of the current period (35% in 2020). At the end of the period, the company's land reserve decreased by 2% to 37.41 million flat compared with the beginning of the year. We believe that the company's current soil reserve margin is on the low side, and investors are advised to pay close attention to the follow-up improvement process of soil storage "quantity" and "quality".

Profit forecast and valuation

Taking into account the higher-than-expected decline in settlement profit margin, we lowered our 2021 / 2022 earnings per share forecast by 8% 6% to 1.55 Universe 1.58 yuan. The current share price corresponds to 3.2 times the price-to-earnings ratio of 2021 to 2022. Maintain a neutral rating and downgrade the target price by 8% to 6.20 yuan (due to lower-than-expected full-year results and profit margins), corresponding to a price-to-earnings ratio of 3.9 times 2021 picks and an upside space of 23%.

Risk

In the main layout, urban regulation and control policies tightened more than expected or fundamentals declined more than expected; financing tightened more than expected.