1H24's core net profit fell 19% year on year, slightly lower than our expectations that Yuexiu Real Estate announced 1H24 results: revenue +10% year over year to 35.3 billion yuan, reported gross margin fell 4.1 percentage points year on year to 13.7% (2023:15.3%), and core net profit fell 19% year on year to 1.74 billion yuan, slightly lower than our expectations. The company declared an interim dividend of HK$0.189 per share, with a dividend ratio of about 40%, which is basically the same as the previous period, corresponding to the current dividend yield of about 4.9%.

Adhering to the principle of “fixed investment based on sales”, we focus on high-quality land replenishment in core cities and advantageous regions. The company acquired a total of 12 plots of land in 1H24, and the corresponding land payment was about 12 billion yuan. Open market/diversified land acquisitions accounted for 34%/66% of the area obtained. In diversified land acquisition methods, TOD and urban renewal are progressing steadily:

1) The company acquired 19.1% of Pazhou South TOD Phase II's shares in the first half of the year, with a total consideration of about 2.23 billion yuan and a total construction area of about 0.58 million square meters (the average transaction price of the company's Pazhou South TOD Phase I project was about 0.12 million yuan/square meter). The project started in December last year and contributed 4.1 billion yuan in sales by the end of 1H24. 2) Iin-dong Village achieved the first batch of land supply of about 0.14 million square meters. Looking at the quality of newly purchased land, it is basically located in the core sector of leading cities such as Guangzhou, Shanghai, Hangzhou, Chengdu, Beijing, and Hefei. We estimate that the average gross margin at the project level is about 15%, and the average net profit margin falls within the 8-10% range. We expect that in the second half of the year, the company will still adhere to the principle of quantification and use the “6+1" storage growth model as a starting point to focus on the eight core cities (Beijing, Shanghai, Guangzhou, Shenzhen, Hefei, Hangzhou, Chengdu, and Xi'an) to take the opportunity to supplement high-quality soil storage.

The financial situation is stable, and the financing advantage is strong. The company's pre-debt ratio, net debt ratio, and short-term cash loan ratio remained at 68.3%, 60.6%, and 1.5 times at the end of 1H24. Since the beginning of the year, the company has issued two 3-year offshore RMB dim sum bonds with a total weighted average coupon interest rate of 4.07%, domestic bonds totaling 3.3 billion yuan, and coupon interest rates of 2.20-2.75%. Most of the new development loan costs remained below 3% during the year, driving the average financing cost to a marginal decline of 0.16ppt to 3.47% at the end of 1H24.

Development trends

The company expects year-on-year sales to be generally stable throughout the year. The company achieved sales volume of 60.4 billion yuan in January-July, a year-on-year decrease of 34%, which is roughly similar to the decline in Kerry's Top 10. The main reason is that the company's new sales pace since this year (total supply in the first half of the year was about 110 billion yuan, with almost no new promotions). The company plans to supply a total of 160 billion yuan in the second half of the year, with the Greater Bay Area/East China accounting for 51%/21%. We believe that with subsequent increases in volume and supply structure improvements, the company's annual sales performance is expected to be better than the industry average.

Profit forecasting and valuation

Based on the settlement pace and margin adjustments, we lowered our 2024-25 profit forecast by 12%/12% to 2.99/2.99 billion yuan, which is basically the same as -14% year over year. Considering weak fundamentals in the industry to suppress investor bias, the target price was lowered by 30% to HK$4.97, corresponding to 6.0/5.9, 0.32/0.30 times the 2024-25 P/E, P/B, and 30% upward space. Considering that the company's land storage focuses on the first and second tier, state-owned enterprises have an outstanding background financing advantage and maintain an outperforming industry rating. Currently trading at 4.6/4.5, 0.24/0.23 times 2024-25 P/E, P/B.

risks

The recovery in industry sentiment was slower than expected; inventories depreciated beyond expectations.