1-3Q21's performance fell short of our expectations

Rongsheng Development announced 1-3Q21 results: operating income of 45.9 billion yuan, up 5% year on year, net profit of 3.1 billion yuan, down 30% year on year, lower than our expectations, mainly because the 3Q21 settlement scale and profit margin fell short of expectations.

Settlement scale and profit margins declined year-on-year in the third quarter. The company's 3Q21 settlement revenue was 11.7 billion yuan, a year-on-year decrease of 33%, and a decrease of 48% from 2Q21. 3Q21 post-tax gross margin fell 4.5ppt to 16.1% year on year (1H21 was 22.3%), driving gross margin down 4.1ppt to 20.7% in the first three quarters, leading to a 61% year-on-year decline in 3Q21 profit. The year-on-year decline in earnings in the first three quarters widened to 30% (1H21 fell 14%).

At the end of the third quarter, the “third tier is all green” was achieved. The company's net debt ratio at the end of the period was 58.9%, down 21.3 ppt from the beginning of the year, and the withholding balance ratio was 69.49%, down 4.7ppt from the beginning of the year. The short-term cash debt ratio was 1.05 times (1.23 times at the beginning of the year), and the transition from the “yellow tier” to the “green tier” met the standards; consolidated repayments for the first three quarters increased 20% year-on-year to 57.5 billion yuan, and year-end interest-bearing debt fell 16% from the beginning of the year. Currently, the company still regards reducing the level of leverage and improving financial security as its primary business goals.

Development trends

The annual sales target is expected to be achieved, and land acquisition will be suspended to maintain financial security. The company's sales in the first three quarters increased 25% year on year to 92.3 billion yuan, of which the third quarter increased 27% year on year to 32.4 billion yuan. The company plans to achieve a sales target of 130 billion yuan for the whole year, corresponding to a year-on-year growth rate of 2%. 71% was completed in the first three quarters. Considering that the company is currently actively using promotions and other means to speed up removal and increase repayment, we expect the company to achieve its annual goals. To achieve the target of reducing leverage, the company did not add new land storage in the third quarter. Since the beginning of the year, the land acquisition intensity has been only 13%. We judge that in the future, the company will still suspend land acquisition to ensure financial security as a priority.

The annual performance growth rate is expected to be under pressure. Considering the uncertainty of the company's fourth quarter completion settlement scale (planned completion area of 7.19 million square meters in 2021, up 3% from the actual completed area in 2020), we anticipate that the company's settlement revenue for the fourth quarter may continue to decline from the third quarter. Combined with low gross profit projects, we expect gross margin to drop by 3-5 percentage points to about 20% after settlement tax for the whole year, and the growth rate of net profit returned to the mother throughout the year will be clearly under pressure.

Profit forecasting and valuation

Considering the uncertainty of settlement size and profit margins, we lowered our 2021/2022 earnings forecast by 34%/33% to $45/4.6 billion. The current stock price corresponds to 4.2/4.0 times the price-earnings ratio of 2021/2022.

Maintaining the neutral rating, the target price was lowered 33% to 4.15 yuan to reflect changes in profit forecasts. The new target price corresponds to 4.0/3.9 times the 2021/2022 price-earnings ratio and 3% downside.

risks

Funding exceeded expectations and tightened; sales in major cities declined more than expected.