2021 core net profit to fall 9% YoY, in line with market expectations
Multiple factors weigh on 2021 earnings. We expect the firm’s 2021 residential development revenue to grow over 40% YoY, but core net profit to fall about 9% given the decline in gross margin (about 2ppt), the provision for inventory impairment (over Rmb1bn) and the rising proportion of minority interests to profit after tax. We expect the firm to maintain its payout ratio at 40% with a dividend yield of 11.6%.
Sales growth solid; sales proceeds collection sound. The firm’s 2021 sales grew 9% to Rmb137.1bn with a sell-through rate of 65%, staying flat with that of 2020. In terms of sales quality, we expect the stake to stay at 65–67% and cumulative full-year sales proceeds collection was about 95%, which was at a high level in the industry (especially for private companies). Meanwhile, the firm strategically reduced inventory (such as parking spaces and completed projects in lower-tier cities) as the real estate market cooled in 2H21. The firm increased sales volume by offering discounts, and thus, we expect its full-year sales gross margin to drop to around 18% (slightly above 20% in 1H21).
Strong advantages in financials. We expect the firm's financial indicators under the "three red lines" guidelines to stay flat or improve by end-2021. We expect the firm’s liability-to-asset ratio (excluding sales deposits) to drop mildly by 1–2ppt (vs. 74.7% in 1H21), and the net gearing ratio to fall slightly to 50–55% (vs. 58.2% in 1H21). Considering the new financing cost was lower than existing financing cost (vs. 4.92% in 1H21), we expect the firm’s average financing cost to trend down further to stay below 4.9% by end-2021. In addition, the firm has obtained a Rmb5bn quota for medium-term notes.
Trends to watch
Contract sales value likely to see steady growth in 2022. The firm’s land acquisition in 2021 focused on cities it had previously entered, and Fuzhou was the only new market. The firm acquired a total of 45 land parcels, with attributable land cost to sales ratio standing at 37%, and saleable resource value reaching about Rmb120bn. We expect the firm’s unsold resources to stay stable YoY, covering nearly 3 years of sales. We expect the firm’s 2022 sales to see positive growth thanks to its ample land bank, enhanced product competitiveness, and turnover due to the firm’s strategy of prudent land acquisition in existing markets. We expect the firm’s gross margin for sales to recover to above 20% as its gross margin of land acquisition and land bank was higher than 20% in 2021.
Valuation and recommendation
Considering the progress of delivery and adjustments in gross margin, we lower our 2021 and 2022 earnings forecasts 26% and 30% to Rmb3.93 and Rmb4.13bn, implying YoY growth of -8.7% and 5.0%. We introduce our 2023 earnings forecast of Rmb4.33bn, implying growth of 5.0%. The stock is trading at 3.3x 2022e and 3.1x 2023e P/E. We maintain an OUTPERFORM rating. We cut TP 20% to HK$16.51 to reflect adjustments in EPS, implying 4.2x 2022e P/E with 30% upside.
Risks
Tighter-than-expected housing regulations and/or financing and credit environment for real estate companies.