Matters:

In the first half of 2024, the company achieved operating income of about 139.2 billion yuan, a year-on-year increase of 1.66%, and net profit to mother of about 7.4 billion yuan, a year-on-year decrease of 39.29%.

Commentary:

Land storage burdens dragged down profit realization, and gross margin fell 5 percentage points from the same period in 2023. 1) Profit declined rapidly in the first half of 2024. The main reason was that project carry-over gross margin declined due to market decline and price pressure. The company's gross profit margin in the first half of 2024 was 16%, down 5 percentage points from the same period in 2023; there may still be asset depreciation pressure in the second half of the year. 2) By the end of June 2024, the company's unsold land storage was 0.13 billion square meters (total construction area - contracted area), of which the central, western, and northeastern regions accounted for about 37% of unsold land storage, which was basically the same as at the end of 2023. The main reason was that the real estate market was clearly divided regionally. Inventory removal in the Midwest and Northeast regions was slow, and low-quality land storage burdens dragged down profits.

Equity sales fell 17% year over year in the first half of the year. Only 12 parcels of land were acquired, and 3 projects have already been opened. 1) In the first half of 2024, the company achieved a contract area of 9.5425 million square meters, a year-on-year decrease of 31.01%, and achieved a contract amount of 173.336 billion yuan, a year-on-year decrease of 26.81%. The decline was less than that of the top 100 real estate companies (40% year-on-year decrease). The equity sales amount was about 133 billion yuan, a decrease of 17% year-on-year, lower than the full-caliber sales decline. 2) In January-June, the company acquired 12 parcels of residential land, with a construction area of about 1.16 million square meters, a total land price of 12.6 billion yuan, an equity land price of 10.9 billion yuan, and an investment intensity of about 7.3% (land price/sales amount). Among the newly acquired projects, 3 of the newly acquired projects have already started. The Beijing Xingchen Hexu, Xi'an Tianzan, and Tianjin Xitang Hexu Phase II projects were first opened and subscribed for about 2 billion yuan.

The company's financing advantages are prominent, and the cash flow is abundant. 1) The company actively grasped the low-interest financing window. The average cost of additional financing decreased by 21 BP to 2.93% compared to 2023; by the end of June, the company's total interest-bearing debt was 373.5 billion yuan, and the comprehensive cost was reduced to 3.31%, down 25 BP from the beginning of the year. 2) In the first half of 2024, a cumulative return amount of 146.6 billion yuan was achieved, with a return rate of 84.6%. The company's cash balance at the end of the period was 146.4 billion yuan, accounting for more than 10% of total assets; the company's consolidated statement had sold the pending return capital (including sales tax) of 103.3 billion yuan, and the overall cash flow was reasonable and abundant.

Investment advice: Financing advantages guarantee that the company continues to focus on core cities, improve the quality of soil storage, and lay the foundation for future profit margins and ROE recovery, but there may be depreciation pressure on the company's existing land storage in the short term. We expect the company's EPS in 2024-2026 to be 1.02, 1.08, and 1.24 yuan respectively. Based on the residual income model, the target price for 2024 is 13 yuan, which corresponds to 12.5 times PE in 2024, and maintains the “recommended” rating.

Risk warning: The industry continues to shrink unilaterally, and the market is declining beyond expectations.