The company's performance is in line with market expectations

Urban Construction Development announced 1H24 results: operating income fell 33% year on year to 6.5 billion yuan; gross margin before tax fell slightly by 1.5ppt to 19% year on year (20% in 2023); dragged down by equity investment, investment income turned negative to -0.28 billion yuan, resulting in a net profit loss of 0.14 billion yuan (0.48 billion yuan year-on-year profit last year), falling within the performance forecast range.

Completion was reduced by about 30% year-on-year, and equity investment dragged down performance. The completed area of 1H23 fell 34% year on year to 0.72 million square, leading to a similar decline in settlement revenue, and settlement gross margin remained stable compared to 2023. The main factor behind the company's loss during the period was the decline in the share price of Nanwei Medical held by the company Zhongke Investment Promotion Company, which caused the company to record an investment income loss of more than 0.3 billion yuan; if the influence of this factor is excluded, the company's main real estate business is actually profitable.

Cash is abundant, leverage indicators are optimized, and the cost of issuing new bonds continues to decline. 1H24 achieved a net operating cash inflow of 5.2 billion yuan, cash on hand at the end of the period, and the coverage ratio for short-term liabilities increased 2.2 times (1.6 times at the end of 2023); the net debt ratio and withheld debt ratio were 114% and 73%, respectively, an improvement from the beginning of the year. In January-August, the company issued 6 winning notes, corresponding to a total financing amount of 6 billion yuan. The weighted average financing cost was only 2.78% (3.4% average bond issuance cost in 2023). We expect the company's stock debt financing costs to drop further (4.12% at the end of 2023).

Entered Shanghai for the first time during the year to reserve high-quality resources through multiple channels. With the support of sufficient capital at hand, the company has participated in 10 land auctions totaling more than 0.66 million square meters since the beginning of the year, adhering to the investment and development strategy of deepening Beijing and taking the opportunity to expand into hot regions. In January-July, the company acquired two plots in Beijing, Linhe, Changping, and two plots in Shanghai, Yangpu Changhai, and Yangpu Changbai. The total land acquisition price reached 5.9 billion yuan, corresponding to a land acquisition intensity of about 35%. We expect the additional value to exceed 10 billion yuan. In addition, the company continues to make full use of its advantages in the field of urban renewal and obtained the main authorization for the first phase of the Tongzhou Old Town Bungalow Shed Renovation Project; considering that the Shunyi plot obtained by the company this time is a second-level land concession for the previous riverfront shed reform, we believe that the Tongzhou shed reform project is also expected to lay a good foundation for cooperation to obtain land storage resources in the future.

Development trends

Under the high base, 1H24 sales are under pressure, and new launches are expected to increase in the second half of the year. 1H24's sales fell 48% year on year to 11.9 billion yuan, mainly due to the weak market sentiment in Beijing and the decline in the scale of the company's new sales during the period, while Tiantanfu and other popular projects were launched or launched centrally during the same period last year. Looking ahead, we believe that the company will continue to push forward the elimination of Beijing projects, especially the number of offices, parking spaces, and warehouses, and with the entry of new Beijing-Shanghai projects into the market, we expect the company's sales performance to outperform the industry average in the second half of the year.

Profit forecasting and valuation

We keep our profit forecast unchanged. The current share price corresponds to 0.4/0.4 times 2024/2025 P/B. Maintain the outperforming industry rating and target price of 5.25 yuan unchanged, corresponding to 0.5/0.4 times 2024/2025 P/B and 25% upward space.

risks

The scale of land acquisition fell short of expectations; settlement progress fell short of expectations; and the decline in heavy city prosperity exceeded expectations.