Committed to deleveraging
- CIFI’s core net profit declined by 46% yoy in 1H22. It did not declare any interim DPS in order to retain cash for working capital.
- Chairman expects CIFI to deleverage gradually with no higher than 50% net gearing after 3-4 years, and to continue to explore diversified businesses.
- We project its overall GPM to be 18-19% in FY22-24F in the absence of company guidance, assuming flattish property prices ahead.
- Reiterate Add with a lower SOP-based TP of HK$3.7. CIFI is one of our preferred names among non-state-owned developers.
Core net profit down 46% yoy in 1H22
CIFI reported a 46% yoy decline in core net profit in 1H22 to Rmb1.8bn (32% below our forecast). While its overall gross profit margin (GPM) was unchanged yoy at 20.7%, it made impairment provision of Rmb377m (nil in 1H21). No interim DPS was declared for 1H22 (Rmb0.10 for 1H21) as management attempts to retain cash for working capital.
We project a 35% yoy decline in FY22F contracted sales
CIFI’s contracted sales decreased by 50% to Rmb79bn in 7M22. On the back of weak buyers’ sentiment and pandemic-related quarantine measures, we think a meaningful recovery in contracted sales is unlikely in the near term and project its FY22F contracted sales to be Rmb160bn (down 35% yoy), even if its sales momentum in Jul 22 can be maintained for the rest of FY22F. It replenished Rmb16.9bn of saleable resources YTD, 84% of land premium was paid for new projects in Tier-1 or Tier-2 cities.
Chairman: to see lower net gearing of below 50% in 3-4 years
Management explains that the Rmb15bn hoh decline in cash balance was largely due to 1) payment of debt at the JV level and 2) net settlement of Rmb10bn payables in 1H22, and that its net cash flow from operating activities was still positive in 1H22. As a result of lower cash balance, its net gearing increased by 15.7%pt hoh to 78.5% at end-Jun 22. Chairman Lin targets to lower CIFI’s net gearing to below 50% in 3-4 years and to below 30% in the longer term.
Incubating diversified businesses could take a few years
Management reiterates CIFI’s ongoing efforts to diversify into property-related businesses, namely property management (Ever Sunshine), commercial leasing, residential leasing (Lingyu) and construction management. In our view, except for Ever Sunshine, the incubation of other businesses could take a few years for a separate listing, and before that CIFI would still rely on property sales to drive earnings growth.
Reiterate Add with a lower TP of HK$3.7
We cut FY22-24F EPS by 33-42% to factor in 1) slower sales delivery, 2) lower overall GPM projections (18-19%), 3) higher impairment provisions and 4) higher share of minority interests. Our SOP-based TP for CIFI is cut to HK$3.7. Reiterate Add. Potential re-rating catalysts include faster-than-expected recovery in contracted sales, while key downside risks include prolonged pandemic-related lockdowns and further GPM erosion.
