To see better liquidity upon policy relaxation
? Zhongliang’s core net profit declined by 20% yoy in FY21 with a lower GPM of 17% (down 4%pt yoy). No final DPS was declared.
? We expect a 22% decline in FY22F contracted sales due to little land replenishment in 2H21 and weak sales sentiment in 1Q22.
? Upgrade to Hold with a lower TP of HK$2.5. We believe the more favourable property market policies render ZL’s valuation slightly more attractive.
FY21 core net profit declined by 20%
Zhongliang (ZL) reported a 20% yoy decline in core net profit to Rmb2.99bn in FY21 (vs. our estimate of Rmb2.8bn). Gross profit margin (GPM) narrowed by 4%pt yoy to 17.1% due to high land costs for projects delivered as well as impairment provisions for property projects. It declared no final dividend for FY21; it had earlier postponed the payment of FY21 interim DPS of Rmb0.154 to about 31 Aug 22.
We expect a 22% yoy decline in contracted sales in FY22F
ZL achieved 2% yoy growth in contracted sales in FY21 with Rmb172bn but did not provide a sales target for FY22F. In view of its shorter land bank duration due to lower land replenishment in 2H21 as well as weak sales sentiment in 1Q22, we estimate a 22% yoy decline in its FY22F contracted sales to Rmb135bn. Its unbooked sales (as in contract liabilities) were still sizeable at Rmb121bn, supporting mild growth in its FY22F property sales booking revenue.
Few land acquisitions in 2H21
ZL estimates that 41% of its total saleable resources come from Tier-2 cities in China as of end-FY21, largely unchanged from 43% at end-FY20. It spent only Rmb52.6bn (gross amount), or equivalent to 31% of contracted sales in land acquisition in FY21, as market sentiment on property development worsened. We think it was a prudent move for ZL to preserve liquidity and as a result, its net gearing declined by 30%pt to just 35% at endFY21. We think there will be more opportunities for ZL to acquire more parcels in 2H22, as recent supportive policies from local governments should lead to better sales for ZL
and enhance its capacity for land-banking.
Expected improvement in sales could clear concerns over liquidity
We understand that its auditor (EY) issued an opinion of “material uncertainty related to going concern”, stating that its end-FY21 cash balance was less than the current portion of interest-bearing debt (Rmb19.5bn), plus certain senior note obligations. However, as mentioned above, we argue that the recent supportive policies from local governments could boost ZL’s liquidity and allow for timely repayment or extension of debts due.
Upgrade to Hold with a lower TP of HK$2.5
We cut ZL’s TP to HK$2.5, based on a wider 75% discount to NAV (70% previously) that reflects a high proportion of land bank in Tier-3 or -4 cities. However, we upgrade it to Hold from Reduce; see p.2 for EPS revisions and valuation methodology. Key downside risks included non-payment of debts due soon and further land bank contraction, while stronger-than-expected contracted sales is a key upside risk.