Investment suggestion

We downgraded the IPO investment rating from outperforming the industry to neutral. The reasons are as follows:

The first share company announced its results for the first three quarters of 2023: revenue rose 68 per cent year-on-year to 32.6 billion yuan, gross profit fell 9.8ppt to 9.9 per cent, and net profit continued to lose-3.07 billion yuan, lower than market expectations. The net profit loss of home ownership is mainly attributed to the downward gross profit margin of development and settlement, the loss of asset impairment and credit impairment, and the loss of investment income: 1) 1) the income of 3Q23, driven by centralized housing settlement, increased by 68% to 32.64 billion yuan compared with the same period last year, and the after-tax gross profit margin decreased by 9.8ppt to 9.9% compared with 1H23, but the company's three fee rates further improved, compared with 1H23. 2) the total amount of asset impairment and credit impairment was 570 million yuan; 3) the investment income of 1-3Q23 joint venture company turned to a loss of 680 million yuan compared with the same period last year, the investment of unlisted equity instruments recorded a fair value loss of 500 million yuan, and the final return net profit recorded a loss of 3.07 billion yuan.

The margin of financial leverage has increased. At the end of 3Q23, the company's net debt ratio and deduction debt ratio increased to 153% and 72% from 147% to 71% at the end of last year, while the cash-to-short debt ratio increased to 1.74x (1.03x in 2022). According to the public information of Wind, we estimate that the maturity of the company's domestic bonds in 2024 and 2025 is about 197,244 billion yuan; as of mid-October, the company has issued a total of 5 billion yuan of corporate bonds and 10.9 billion yuan of medium-term notes in 2023, and approved an operating property loan line of 3.2 billion yuan.

The operating end is under pressure in stages. In the first three quarters, the company achieved full-caliber sales of 44.7 billion yuan, down 31% from the same period last year, of which 3Q23 fell by more than 50%, and the overall performance was weaker than the average level of leading housing enterprises (Top50 real estate enterprises in the first three quarters compared with the same period last year-11%). The company's 3Q23 has no new land acquisition, with a cumulative land acquisition amount of 9.4 billion yuan in the first three quarters, with a corresponding intensity of about 21%. By the end of 3Q23, we estimate that the company is building about 1400 million square meters of resources, including 40% of resources in Beijing and 50% of core cities outside Beijing.

What is the biggest difference between us and the market? Combined with the resource endowment and the ability of operation and management, we believe that the capital market overestimates the prospects for the improvement of the company's business performance in the subsequent downward cycle.

Potential catalyst: the recovery of the industry boom is slower than the capital market expectations, or cause negative interference to the company's operating performance and financial control.

Profit forecast and valuation

Taking into account the downward gross profit margin of the settlement project and the provision of credit impairment for some receivables, we reduce the company's 2023 net profit from 210 million yuan to 40 million yuan, leaving the 2024 forecast unchanged; the company's current share price trades at 0.4 amp 0.3 times 2023. At the same time, we downgraded the company's investment rating to neutral, and lowered the target price by 25% to 4.24 yuan per share to reflect the adjustment in earnings forecasts, corresponding to 0.4 Universe 0.4 times 2023 Universe 2024, which has 13% upside compared to the current share price.

Risk

The fundamental repair was less than expected, the settlement volume was lower than expected, and the scale of asset impairment was higher than expected.