1H22 core net profit expected to fall 30% YoY; in line with market expectations
We expect Midea Real Estate’s 1H22 revenue to grow slightly YoY by low single digit to Rmb33-34bn (at Rmb33bn in 1H21), reported gross margin to fall 4-5ppt YoY to 16-17% vs. 18.3% in 2021, and core net profit to drop about 30% YoY, in line with market expectations. We do not expect the firm to propose an interim dividend, which is consistent with its previous dividend policy.
Stronger financials compared with other non-SOEs. Thanks to the support from major shareholders on financing, the firm issued Rmb1.5bn of medium-term notes and Rmb1bn of domestic bonds (simultaneously issued Rmb100mn of CDS) in 1H22 with a coupon rate of 4.5% (average financing cost at 4.82% in 2021). Compared with other non-SOEs, we think the firm enjoys advantages in financing against the credit headwinds in the industry. We expect the firm’s financial indicators under the “three red lines” policy to stabilize, given its stringent financial control in 1H22. We estimate that the firm’s liability-to-asset ratio (excluding sales deposits) may remain flat with end-1H21 at 72%, and its net gearing ratio to rise slightly to 50-55% (at 46% at end-2021). We believe that the firm retains its “yellow grade” status under the three red line policy.
Continuously optimizing structure of land bank. The firm did not acquire land in the public market in 1H22 as it adopted a prudent investment strategy. Instead, it continued to exit or acquire projects, successfully revitalizing funds, refreshing its existing land bank, and improving its resource quality. For example, the firm acquired the total stake of the counterparty (Jinke) in their JV project in Nanjing in March. It also exited its JV projects with Jinke in Liuzhou and Yueyang. The firm continued to increase the proportion of land bank in higher-tier cities. We estimate the firm had nearly Rmb360bn of unsold resources so far, which could support its sales in the next 3 years.
Trends to watch
Sales to reach Rmb100bn in 2022.The firm’s 1H22 sales dropped 52% YoY to Rmb40bn, mainly due to the weak real estate market in cities where the firm has a presence (middle-level cities representing 48% of the land bank). As a result, the firm’s sell-through rate came under pressure and its launch of new products was delayed (the value of its new launches at about Rmb37bn, down about 50% YoY). We estimate the firm’s 1H22 sales gross margin at around 15%, largely flat with 2H21. Considering the ample available-for-sale resources in 2H22, (a carryover of about Rmb70bn, with the flexible launch of new products depending on the market recovery), we expect the firm’s full-year sales to reach Rmb100bn (a target of Rmb140bn in early 2022), implying sales growth of about 10% in 2H22. We expect the firm’s 2022 results to be under pressure, due to the firm’s lower expectation of sales compared with early 2022.
Financials and valuation
We lower 2022 and 2023 earnings forecasts 19% and 27% to Rmb3.31bn (-15% YoY) and Rmb3.15bn (-5% YoY), given adjustments in delivery and gross margin. The stock is trading at 3.6x and 3.8x 2022e and 2023e P/E. We maintain OUTPERFORM but cut TP 27% to HK$14.25, implying 4.9x and 5.2x 2022e and 2023e P/E with 40% upside, as the firm’s valuation may come under pressure from uncertainties over its full-year results.
Risks
Slower-than-expected recovery of industry fundamentals; sharper-than-expected decline in settlement profit margins.