Key points of investment
One sentence logic: China Merchants Shekou is a leading comprehensive development and operation service provider. The city's focus on strategy drives sales and profits to exceed expectations
Logic beyond expectations:
1) Intensive introduction of central and local policies in May
On May 17, the central bank successively relaxed interest rates, down payment ratios, and provident fund loan policies, and the Ministry of Housing and Construction made clear guarantees to advance the transfer of buildings and plans to advance the acquisition of new homes. In mid-late May, Shenzhen, Guangzhou, and Shanghai successively relaxed policies such as down payment ratios, mortgage interest rates, and provident fund loans to help restore the demand side of real estate. According to the policy research framework established by the May 4 “Breaking the Negative Cycle and Exploring Remediation Paths” industry in-depth report, we believe that key cities successively implemented the May 17 policy guidelines in May, which played an important role in reversing real estate demand-side expectations. High-quality leading developers, such as China Merchants Shekou, are expected to benefit from fundamental restoration brought about by strong policies.
2) 2024Q1 performance exceeded expectations, and gross margin began to recover
2024Q1 achieved operating income of 23.747 billion yuan, an increase of 58.22% year on year; realized net profit of 332 million yuan, an increase of 22.22% year on year; realized net profit without return to mother of 292 million yuan, an increase of 8% year on year; and gross profit margin of 14.50%, up 1.88 percentage points year on year. The sharp increase in the company's 2024Q1 revenue was mainly due to an increase in carry-over revenue from real estate projects. We believe this is inseparable from the company's soil storage quality and brand recognition. Since the company can still maintain good sales resilience during the downturn in the industry cycle, the 2024Q1 carry-over performance can exceed expectations. Furthermore, the company's gross margin has recovered, which we believe shows that the company's city-focused strategy has shown results.
Inspection and catalysis
1) Sales scale ranks among the TOP5
In 2023, the company achieved a sales area of 12.23 million square meters, +2.5% year over year, sales amount of 293.6 billion yuan, +0.4% year over year. The sales scale industry ranking rose 1 place from last year to 5th place. In terms of intensive urban development, the company ranked in the top five in local sales in 13 cities across the country. The number of cities in the top five increased by 1 compared to 2022, showing the results of the focus strategy.
2) Focus resources on core cities
In 2023, the company acquired a total of 55 parcels of land, with a total construction area of about 5.9 million square meters, a total land price of about 113.4 billion yuan, and a land acquisition intensity of 38.6%. The company's investment in the “Strong Heart 30 Cities” and “Core 6+10 Cities” accounted for 99% and 88% respectively, of which the investment from Beishang Guangshen accounted for 51% of the company's total investment. According to data from the China Index Institute, from January to January 2024, the company's cumulative equity acquisition amount was 6.549 billion yuan, an increase of 30.98%; the cumulative equity acquisition area was 349,600 square meters, an increase of 34.46% over the previous year; and the cumulative value of additional equity was 15.426 billion yuan, an increase of 36.86% over the previous year. The company insists on focusing on core cities, and new land acquisition projects are mainly concentrated in the Yangtze River Delta region. We believe that the Yangtze River Delta region has strong population mobility and economic vitality, and the region's demand for home purchases is expected to recover first.
3) Actively calculate depreciation when the cycle is declining
China Merchants Shekou's total asset impairment losses in 2021-2023 were 10.7 billion yuan, accounting for 20% of the total profit for the three years. We believe that the company actively calculated impairment, laying a solid foundation for subsequent carry-over profit restoration. As the 2024H2 policy continues to strengthen, we believe that fundamentals are expected to gradually improve, the risk of further calculation of impairment in China Merchants Shekou will be reduced, and there will be more room for profit release.
4) Other inspection and catalysis: the company's subsequent sales, land acquisition, repurchase and dividend progress.
Investment advice
We believe that as a leading high-quality real estate enterprise, the company has performed well in sales, investment, financing, land storage, etc., and the competitiveness of the industry is outstanding. Furthermore, on the premise of stabilizing the basic market of real estate development, the company continues to develop diversified businesses such as asset operations and urban services to enhance long-term competitiveness. We believe that the company will eventually benefit from supply-side structural optimization in the real estate industry, and future profitability and valuation are expected to both improve. We expect the company's net profit to be 78, 93, and 10.4 billion yuan for 2024-2026, corresponding EPS of 0.86, 1.03, and 1.15 yuan, maintaining a “buy” rating.
Risk warning: The effect of the relaxation of real estate policies fell short of expectations, and sales declined beyond expectations.