The company's recent situation
Driven by improved sector sentiment, the company's stock price has risen 32% from its low on April 24 to the close of May 24, and is currently trading 0.7 times the 2024 net market ratio. We continue to be optimistic about China Merchants Shekou. As a leading state-owned enterprise with outstanding resource endowments and excellent financial credit, the company is leading the way in terms of soil storage and warehouse exchange and baggage clearance, and has opportunities for upward flexibility in procyclical management and performance restoration. We recommend that investors pay attention to the company's phased profit consolidation opportunities and adjust the layout every time.
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Reverse the market with high-quality investment and development, and continue to consolidate business advantages. In 2023/1Q24, the company's land acquisition intensity was 39%/25%, respectively. We estimate that the company added value of 200020 billion yuan, and focused on the most resilient basic Tier 1 and 2 cities (Shanghai/Beijing/Hangzhou accounted for 27%/18%/7% of land prices, respectively).
We estimate that at the end of 2023, first-tier and second-tier cities will account for about 40% of the company's saleable value; as the company's land storage and warehouse exchange progresses in an orderly manner, we believe that the company's resource-side advantages may continue to expand.
The policy catalyzed an improvement in sentiment and a return in valuations in the short to medium term. Recently, a package of policies on both sides of supply and demand has formed a synergy in various aspects, such as the implementation of insurance delivery, commercial housing acquisitions, and the reduction of the housing purchase threshold. We believe it will have a certain boost effect on residents' expectations and ability to buy homes, and may be expected to drive leading cities to usher in a steady turning point in volume and price within 6-12 months. Considering the first and second tier core cities of Zhaohe Land Storage, we believe that the company may be one of the housing enterprises that has benefited the most from the fundamental restoration process in the industry; if the sales side recovers steadily, the medium term dimension is expected to usher in procyclical valuation repair.
The steady increase in profit is highly visible, and may promote a shift in momentum for subsequent stock price growth. The company's profit increased by about 40% year-on-year in 2023, mainly driven by factors such as a sharp decline in impairment, expansion of REITs, and an increase in the settlement equity ratio. Our outlook on the company's settlement scale is stable; gross margin may have bottomed out, and the 22-year land acquisition project and the Shenzhen Taizi Bay project are expected to positively boost profit margins in this year's settlement structure. Combined with the company's asset impairment ahead of schedule (the company's estimated inventory impairment totaled 12.3 billion yuan in 2019-23), we believe that the company may be one of the first housing enterprises to break out of the bottom of profit (the growth center is expected to be above 20% this year and next two years), which in turn will drive stock price increases from valuation-driven to performance-driven.
The current valuation is still cost-effective. Driven by improved sector sentiment, the company's stock price increased by 32% cumulatively from the low of April 24 to the close of May 24 (compared with the increases of about 33%/24%/24% from March to December '22, and July-August '23). The company's latest transaction was 0.7 times the 2024 P/B. Horizontally, there is still room for repair compared to 1.0/1.4 times the P/B centre/highest point in 2020-23.
Furthermore, considering that the company's land resources in Qianhai have a premium over the book, and the company's net assets themselves are reasonable to increase, we believe that it can provide a higher safety cushion for valuation and prompt investors to pay attention to future opportunities to adjust their positions.
Profit forecasting and valuation
Keep profit forecasts unchanged. The current share price is trading 0.7/0.7 times 2024/2025 P/B. The target price remained unchanged at 14.0 yuan, corresponding to 1.0/1.0 times the 2024/2025 P/B and 39% upward spatial risk. The recovery in key cities was weaker than expected; the quality of land acquisition fell short of expectations.