1H22 results in line with market expectations
Midea Real Estate announced its 1H22 results: Revenue fell 4.2% YoY to Rmb31.7bn, GM dropped 2.8ppt YoY to Rmb17.9% (largely flat with 18.3% in 2021), and attributable core net profit declined 26.5% YoY to Rmb1.66bn (including inventory impairment provision and forex losses), in line with market expectations. The firm did not announce its interim dividend, which is consistent with its previous dividend policy.
　　Financials improving. Thanks to stringent financial control in 1H22, the firm’s financial indicators under the “three red lines” policy were optimized. In 1H22, its net gearing ratio and liability-to-asset ratio (excluding sales deposits) fell 1.4ppt and 1.8ppt from end-2021 to 44.9% and 70.3%. Its cash-to-short-term-debt ratio came to 1.73 times. 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 credit default swap) in 1H22 with a coupon rate of 4.5%. Its net public financing reached Rmb1bn. In August, it issued Rmb569mn of ABN. Meanwhile, it engaged in strategic cooperation with a number of banks and received quotas for annexation loans and indemnificatory rental housing loans. In 1H22, the firm’s average financing costs fell 0.22ppt from end-2021 to 4.6%.
　　Trends to watch
　　Optimizing structure of land bank likely to support full-year sales. The firm has optimized the structure of its land bank and its business presence in some cities in recent years. Furthermore, it has been exiting or acquiring projects as well as exiting projects in lower-tier cities at relatively low cost since late 2021, successfully improving its resource quality. We estimate the firm has Rmb350-400bn of unsold resources so far, and its stake rose nearly 2ppt from end-2021 to 69% at end-1H22. In 1H22, its sales value dropped 51.5% YoY to Rmb40bn, and the proportion of projects in tier-1 and tier-2 cities increased to 80.2%. We estimate that its GM of sales was relatively stable, at 15-18%. The firm may continue to balance its sales quality and sales volume in 2H22 and flexibly launch new products according to the progress of market recovery. Considering carryover of over Rmb70bn in 1H22 and ample available-for-sale resources, we expect its full-year sales to reach Rmb100bn as the market recovers.
　　Financial report for 2022 likely to fully reflect the firm’s pressure. Given unbooked sales of around Rmb115.6bn (excluding value-added-tax) and GM of 17-18% at end-1H22, we expect the firm’s revenue to largely remain flat but GM to edge downward a little YoY in 2022. However, as the firm will likely book asset impairment losses for inventory and joint ventures’ accounts receivable in 2H22 due to the prudent principal, we expect its full-year attributable core net profit to drop 20-25% YoY. We believe that the firm will see improvement in 2023 given its gradually stabilized booking GM, optimized expense ratio, and marginal decline in the proportion of minority interest. At end-1H22, the firm’s stake in unbooked sales reached 70-75% at end-1H22 (vs. the ratio between attributable net profit and after-tax profit of 71% in 2021).
　　Financials and valuation
　　Due to the adjustment in asset impairment, we cut our 2022 and 2023 earnings forecasts 10% and 5% to Rmb2.99bn and Rmb3.00bn. We expect the firm’s earnings to drop 23.2% YoY in 2022 and edge up 0.3% YoY in 2023. Although the firm’s short-term sales and earnings came under pressure amid headwinds, we remain upbeat on its medium-to-long-term performance as its land bank is solid and financials are healthy. We maintain OUTPERFORM and lower our TP 16% to HK$11.97, implying 4.6x 2022e and 4.6x 2023e P/E with 40% upside. The stock is trading at 3.3x 2022e and 3.3x 2023e P/E.
　　Risks
　　Slower-than-expected recovery of industry fundamentals; sharper-than-expected decline in settlement profit margins.