Items:

According to the company's semi-annual report for 2023, the operating income in the first half of 2023 was about 5.615 billion yuan, down 47.05% from the same period last year, and the net profit was-729 million yuan, down 163.42% from the same period last year.

Comments:

Real estate development business revenue and gross profit margin are both under pressure. 1) the company's revenue in the first half of 2023 was about 5.615 billion yuan, of which the revenue from real estate development business was about 4.436 billion yuan, down 53.91% from the same period last year, with a completed area of 522,000 square meters. 2) the gross profit margin of the real estate development business is-1.80%, which is lower than that of the same period in 22 years. The main reason is that in the face of the market downturn, the company adjusts the sales prices of some projects to promote elimination, resulting in a decline in gross profit margin and even losses on some projects.

In the first half of the year, the sales volume increased by 35% compared with the same period last year, and no new land reserves were added. 1) in the first half of 2023, the contracted sales volume reached 15.77 billion yuan, an increase of 35% over the same period last year, ranking 53rd in Kerry's sales list (full caliber amount), with a signed sales area of 723 million square meters, an increase of 44% over the same period last year. 2) Land acquisition has been cautious since 2022, with a piece of land acquired through equity acquisition, and no new land reserves were added in the first half of 2023. 3) as of the first half of 2023, the company's total land storage is about 1428 million square meters, of which first-tier cities account for 24%, second-tier cities account for 36%, and third-and fourth-tier cities account for 40%. Among them, the land reserves of third-and fourth-tier cities are mainly concentrated in Langfang, Hebei and Huizhou, Guangdong.

High-quality assets in the core area ensure a steady growth in property rental income and a new low cost of issuing bonds. 1) by the end of June 2023, the leasable area of the project held by the company was 123.4 square meters, of which about 850,000 square meters could be rented in Beijing and Shanghai, accounting for 69 percent. In the first half of 2023, the company's property rental revenue was about 890 million yuan, an increase of 10.05% over the same period last year, and a gross profit margin of 89.36%, an increase of 1.3pts over the previous year. 2) from January to August 2023, the company issued a total of 8.2 billion yuan of medium-term notes, with an average coupon rate of only 3.57%. The issuing interest rate was at an excellent level in the market, and the financing structure was further adjusted and optimized.

Investment advice: the company's high-energy urban land storage layout supports sales, but since 2022, the pace of land acquisition, land storage and warehouse exchange is slow, and the development business revenue and gross profit are under pressure in the medium to long term. In addition, the company holds high-quality assets in core cities, and the rental performance is steady and resistant to risks. We maintain the company's eps forecast of 0.22,0.32,0.36 yuan respectively from 2023 to 2025. We calculate the company valuation based on the residual income model, discounting the current book value and future residual income. As the company's ROE has decreased year by year in recent years, the pace of investment has obviously slowed down. We give a 20% discount on the residual income model, and the estimated market value is about 17.4 billion yuan, corresponding to the company's target price of 5.83 yuan in 2023. Maintain the recommended rating.

Risk hint: the market fell faster than expected, and the intensity of follow-up investment was lower than expected.