1~3Q19 performance is in line with our expectations

The company announced 1~3Q19 results: operating income was 10.5 billion yuan, an increase of 15% over the same period last year; net profit returned to its mother was 1.9 billion yuan, an increase of 129% over the same period last year, corresponding to 0.31 yuan per share, in line with expectations.

The significant increase in performance was mainly due to a significant increase in gross profit margin and a decline in the rate of three expenses. During the period, the company's after-tax gross profit increased by 90% compared with the same period last year, the gross profit margin rose to 36% (22% in the same period last year and 29% in the whole of last year), and the financial expenses decreased by 50% to 200 million yuan (mainly due to a big increase in interest income during the period). This led to a decline in the rate of three expenses by 5 percentage points to 6%, which together contributed to a year-on-year increase in net profit of 129% and a net interest rate of 18% (9% in the same period last year and 13% for the whole of last year).

With plenty of cash on hand, the financing advantage is highlighted. At the end of the period, the company's net debt ratio rose to 17% (net cash at the beginning of the year), while cash on hand fell 26% from the beginning of the year to 13 billion yuan, still equivalent to five times the interest-bearing liabilities due within one year. By the end of half a year, the company's weighted average financing cost was 5.0% (5.3% at the end of 2018).

Trend of development

Sales in the fourth quarter are expected to be under pressure. During the period, the company's sales area fell 6 per cent year-on-year to 180000 square meters, sales rose 77 per cent to 7.5 billion yuan, and the corresponding average sales price increased 89 per cent to 42145 yuan per square meter (mainly because Shanghai accounted for 83 per cent of sales. 30% in the same period last year), of which sales and sales area fell 55% and 44% respectively in the third quarter compared with the same period last year. In view of the declining market climate in key cities, we expect that the company's sales in the fourth quarter may still be under pressure.

The lock-up of performance has weakened. At the end of the period, the advance payment of the company fell 38 per cent to 7 billion yuan from the beginning of the year, accounting for only 30 per cent of the annual revenue in 2019 (CICC is expected), down from 49 per cent at the beginning of the year.

Profit forecast and valuation

Taking into account the weakening of the company's performance lock-in, we downgrade the company's earnings forecast of 3% per share for 2019max 2020e to 0.47max 0.52 yuan per share. The company is currently trading at a price-to-earnings ratio of 9.8 pound, 9.0 times 2019 pound, 2020e. Maintain the neutral rating, downgrade the target price by 15% to 5.20 yuan (mainly due to weaker margins at the sales end), corresponding to 10.1 times the target price-earnings ratio of 2019 pound 2020e, which is 11.7% upside from the current share price.

Risk.

The regulation and control policies of key cities have been tightened more than expected, and the company's push and delivery progress has been lower than expected.