Matters:

The company released its semi-annual results report. It is expected to achieve operating income of about 51.273 billion yuan in 2024, a year-on-year decrease of 0.33%; net profit to mother is estimated to be 1.417 billion yuan, a year-on-year decrease of 34.17%; and net profit without return to mother is expected to be 1.399 billion yuan, up 0.45% year on year.

Commentary:

Digesting low-margin soil storage puts pressure on profit margins. In the first half of 2024, total operating income decreased 0.33% year on year, operating profit fell 40.18% year on year, net profit to mother fell 34.17% year on year, and operating profit margin was 5.7%, down 3.8 pcts year on year. Operating profit and net profit to mother declined rapidly, mainly due to a year-on-year decline in gross margin carried over from development business projects and a year-on-year decrease in equity investment income from transferring subsidiaries.

Continuing the land acquisition investment strategy in core cities, the intensity of land investment in the first half of the year was 14.5%. 1) According to Kerry's data, the amount of land acquired by the top 100 housing enterprises fell 40% year on year in the first half of the year. On the one hand, the contraction in the scale of land acquisition was due to housing companies' desire to expand by themselves, and they were more cautious about uncost-effective plots; on the other hand, it was also affected by incremental land supply-side control. 2) China Merchants Shekou obtained a total of 7 parcels of land in the first half of the year, with a total construction area of 0.8014 million square meters, a total land price of 14.6 billion yuan, and an equity land price of 10 billion yuan. The plots are located in Shanghai, Guangzhou, Chengdu, Hefei, etc. Compared with 25% investment intensity in the first half of 2023 and 38.9% investment intensity in 2023, the intensity of land investment in the first half of 2024 was only 14.5%, which is a decline. Consistent with the industry's careful land acquisition, continuing the investment strategy for land acquisition in core locations in core cities.

Sales rankings are steady, and core cities are likely to face downward pressure in the sellable value of goods in 2024. 1) According to the company's announcement, from January to June 2024, the company achieved a total contracted sales area of 4.3871 million square meters and a sales amount of 100.952 billion yuan. The two decreased by 35.9% and 39.3%, respectively. According to the sales list of Kerui's top 100 real estate companies, the company's equity sales amount ranked fifth in the industry, which is a steady increase compared to the same period last year. 2) The company's saleable land storage fell to 450 billion at the end of 2023. The share of land storage in the Midwest increased to a certain extent, and land acquisition efforts declined in the first half of 2024, which may face downward pressure on the saleable value of core cities.

Maintain financing advantages and have abundant cash flow. 1) In the first half of 2024, the company issued ultra-short-term bonds totaling 4.7 billion yuan, with coupon interest rates of 2.09%-2.52%. The company has a financing advantage. 2) As of the end of March 2024, the parent company had a monetary capital of about 20.4 billion yuan and consolidated statement caliber monetary capital of 83.2 billion yuan, with abundant liquidity. 3) According to the financing data of the China Index, the company's credit bonds due in 2024 are only 3 billion yuan, and the pressure to repay the debt in the short term is small.

Investment advice: The company's high-energy urban layout supports sales fulfillment. Since 2022, it has bucked the trend and developed advantages in core cities. As stranded land storage continues to be digested and subsequent Qianhai projects are settled, it is expected that China Merchants Shekou will be the first company to get out of the decline in profit margins. Considering the reduction in the company's depreciation pressure and stable gross margin, we predict that the company's eps will be 0.81, 0.82, and 1.04 yuan respectively in 2024-2026. Considering the medium- to long-term value of the company as a leading central enterprise and the improvement in operational efficiency after implementing the “one city, one template”, the target price for 2024 is 14 yuan, corresponding to 17 times PE in 2024, maintaining the “recommended” rating.

Risk warning: The industry continues to shrink unilaterally, and the market continues to decline sharply.