2021 core net profit in line with market consensus
　　Midea Real Estate announced its 2021 results: Revenue rose 40% YoY to Rmb73.7bn, and gross margin fell 3.9ppt YoY to 18.3%. Specifically, Rmb1.47bn inventory impairment losses in sales costs （previously belonging to administrative expenses） dragged gross margin by 2ppt. The firm’s core net profit fell 9.5% YoY to Rmb3.9bn, in line with consensus. It maintained a dividend of HK$1.60 per share in 2021, implying payout ratio of around 43% （vs. 40% in 2020） and a dividend yield of 11.1%.
　　Stronger financials compared with other non-SOEs. As of 2021, the firm’s financial indicators under the “three red lines” guidelines continued improving. Its liability-to-asset ratio （excluding sales deposits） fell 2.6ppt from end-1H21 to 72.1%, and its net gearing ratio dropped 11.9ppt from end-1H21 to 46.3%. Its cash-to-short-term-debt ratio came to 2.2 times. Average financing costs also fell 0.1ppt from end-1H21 to 4.82%. As one of the private companies that obtained the quota for medium-term notes between banks, the firm issued Rmb1.5bn of 4-year medium-term notes on February 25, 2022 with a coupon rate of 4.5%. Furthermore, it received an Rmb39bn quota for annexation loans and indemnificatory rental housing loans and a Rmb36bn quota for special mortgages from China Merchants Bank, Bank of Communications, Agricultural Bank of China, and China Construction Bank. We think these can cement the stability of its financing.
　　Land bank solid. We estimate the firm had nearly Rmb500bn of unsold resources as of 2021, which could support its sales in the next 3 years. The firm has been expanding its presence in tier-2 and tier-3 cities in recent years. It only entered four new cities in 2020 （e.g. Wenzhou, Luoyang, Shaoxing, and Zhuhai） and one new city （Fuzhou） in 2021. We estimate higher-tier cities currently account for around 90% of its land reserve. Furthermore, the firm has been exiting or acquiring projects since late 2021, successfully revitalizing funds, replacing old land reserves with new ones, and improving its resource quality. Given its background in the manufacturing industry and intelligent construction, we expect its product power to improve, lending solid support to the sell-through rate and profit of future sales （sell-through rate stabilized at 65% in 2021, and sales gross margin at around 18%）。
　　Trends to watch
　　2022 sales target at Rmb140bn, implying 2% growth YoY. The firm’s 2021 sales value grew 9% YoY to Rmb137.1bn. Its full-year cash collection rate came to around 95%, higher than most non-SOEs. In our view, the firm has over Rmb200bn of supply in 2022.
　　Financials and valuation
　　We largely maintain our 2022 and 2023 earnings forecasts. We believe the firm’s solid financials and land reserves could make its operations more resilient despite pressure on financing and sales in the industry. If the real estate market recovers, we think the firm’s advantage in financials compared with other non-SOEs create upside in land acquisition and sales. Maintain OUTPERFORM. We lift our target price 18% to HK$19.48 （5.0x 2022e P/E and 4.8x 2023e P/E, offering 35% upside）。 The stock is trading at 3.7x 2022e and 3.5x 2023e P/E.
　　Risks
　　Progress in the recovery of the real economy disappoints; spillover effect of some property developers’ credit issues.