HUAFA PROPERTIES(600325)：FAVORABLE CONDITIONS IN PLACE FOR THE NEXT STAGE OF GROWTH

As one of the few leading local state-owned enterprises (SOE) which have expanded across China, Huafa Properties (Huafa) has strong property development capabilities and balances well between scale-up and financial stability. With the target markets clearly defined, Huafa’s market share in and profits from its home market Zhuhai have remained stable at a high level, while it continues its all-out expansion in core cities across China. We believe Huafa will maintain sustainable and stable growth on the back of its strength and high credit rating despite fluctuations in the real estate sector. We assign 7x 2022E PE to derive a target price of Rmb11.6 and initiate coverage with a "BUY" rating.
A leading local SOE with strong property development capabilities Backed by Huafa Group, the largest state-owned conglomerate in Zhuhai, Guangdong, Huafa has been deeply engaged in the real estate sector for 30 years. Huafa’s contracted sales exceeded Rmb10bn for the first time in 2015 and jumped to over Rmb100bn just five years later in 2020 with a CAGR of 40.8%. In 2021, Huafa’s contracted sales, at 4.69mn sqm by gross floor area (GFA), reached Rmb121.9bn, ranking 32nd in China in terms of the sales value. Along with the scale-up, Huafa has also continuously improved its profitability with an attributable net profit margin of 8.8% in 1Q22, a historic high.
Unbreakable status in Zhuhai and fruitful expansion across China Zhuhai posted strong economic performance in 2021 with GDP per capita reaching Rmb159k, overtaking Guangzhou as the second highest in Guangdong, and the city has strong attractiveness to talents and businesses.
Huafa has long been in a leading position in Zhuhai’s real estate market with outstanding capabilities in sales and land acquisitions. In 2021, Huafa's contracted sales by GFA topped the rank in Zhuhai at 920k sqm, approx. four times those of the second place and accounting for 41.8% of those of the top 10. The estimated average gross profit margin (GPM) of residential land Huafa obtained in the recent three years is 34.1%, far exceeding the national average during the same period. Since 2012, Huafa has been fully executing the strategy to “stand firm in Zhuhai and expand across China”. In 2021, Huafa had nearly 120 ongoing projects across more than 30 cities and the proportion of sales and revenue contributed by the East China, South China, and North China regions has continuously increased. Huafa’s land reserves are reasonably distributed across regions and balanced across city tiers, with 57% located in new first-tier and second-tier cities and 42% of project starts and ongoing projects located in first-tier and new first-tier cities. It also has rich project resources contributing to deferred revenue, which guarantees stable earnings growth in the future.
Optimized debt structure and smooth financing channels In 2021, Huafa significantly optimized its financial structure and complied with all requirements under “the three red lines”, with its assets-to-liabilities ratio (excluding presales proceeds) at 67.1% (vs. the 70% ceiling), net gearing ratio at 90.5% (vs. the 100% cap), and cash to short-term debt ratio at 2.2x (vs. the 1x lower limit), all of which improved significantly compared with 2020. In 2021, Huafa’s total amount of short-term interest-bearing debt was Rmb23.3bn (-40.4% YoY) and average financing cost was 5.8%, a historic low. While maintaining its high credit rating, Huafa issued over Rmb9bn debt instruments in 2021, with an ending cash balance of Rmb54.9bn. In Mar 2022, Huafa announced that it has applied for the issuance of medium-term notes with a total amount of no more than Rmb10bn, providing a guarantee for future development investment and business expansion.
Diversified business development under one core front and two flanks On the basis of maintaining sustainable growth in the core residential property development business, Huafa has continuously promoted the development of its commercial property projects and its vertical expansion, while improving the synergy among the core business and the two growth initiatives to enhance its comprehensive competitiveness. The three business lines of commercial property projects have gradually taken shape, while Huafa continues to deepen vertical expansion. In 2021, the two growth initiatives contributed Rmb2.64bn to revenue, implying a five-year CAGR of 30.6%, and Rmb770mn to gross profit, with a record high GPM of 29.3%.
Potential risks:
Credit pressures due to the further downtrend in the real estate market after 2Q22 under the impact of Covid-19 despite its SOE status; potential losses from non-Zhuhai projects due to low profitability; management and property development capabilities in some regions pending improvement; funding risks from partners in the large number of property joint ventures.
Investment recommendation:
We look forward to the chance for the developer with a high credit rating to enter the next stage of growth. Huafa is one of the few leading local SOEs which have expanded across China. With the target markets clearly defined, it will likely maintain stable growth in the future. Our 2022E/23E/24E EPS estimates are Rmb1.65/1.81/1.82, respectively. Based on the valuation of comparable peers, we assign 7x 2022E PE to derive a target price of Rmb11.6 and initiate coverage with a "BUY" rating.
【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。