In the local auction in Hefei on March 22, 15 plots with competitive quality were put on the auction table, and China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) participated in the auction of 8 at one go. Unfortunately, there was no “winning lot”.
Jiang Tiefeng, the managing director of the company, said bluntly at the 2021 annual performance conference, “we are the enterprise with the most applications”. Heroic participation in auction is nothing more than optimistic about the market. In the view of the management, the risk of bidding, auction and hanging land should be controlled.
In the early years, due to the demand of scale, China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) high cost won many projects. With the carry over of these projects into the market, the company’s gross profit margin also began to show a downward trend. In 2021, the index further declined to 25.5%, and the net profit margin fell to 9.5% from 13% in 2020.
Although the decline in gross profit margin is the general trend of the industry, the declining profitability for many years has inevitably attracted questions from the outside world. How should the company balance profitability in scale expansion?
Gross profit margin fell for two consecutive years
This afternoon, China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) held an online performance conference. With Jiang Tiefeng, chairman Xu Yongjun, deputy general manager Nie liming, chief financial officer Huang Junlong, deputy general manager and Secretary of the board of directors Liu Ning, deputy general manager and general counsel Liu Ye attended.
The management is satisfied with the “report card” in the first year of the 14th five year plan. In 2021, China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) achieved annual contracted sales of 326834 billion yuan, ranking seventh in the industry in one fell swoop; The corresponding revenue was 160643 billion yuan, a year-on-year increase of 23.93%; Financing cost reduced to 4.48%
However, a piece of good data still can not hide the decline in the company’s profitability. During the reporting period, China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) net profit attributable to parent decreased by 15.35% year-on-year to RMB 10.372 billion, with basic earnings per share of RMB 1.16, a year-on-year decrease of 20.55%.
This is the second year that the company has increased its income without increasing its profits. In 2020, China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) net profit attributable to parent decreased by 23.58% year-on-year, the first decline in growth in recent years, and the decline narrowed in 2021.
In terms of regional distribution, the company’s gross profit margin fell to varying degrees in several regions in East China, Jiangnan, southwest, South China and Shenzhen, where the revenue accounted for more than 10%. Among them, the gross profit margin in Southwest China decreased by 4.51 percentage points year-on-year, while that in East China was 4.65 percentage points.
The East China region with the largest decline is also the region with the largest contribution to China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) revenue. In 2021, China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) the revenue from this region accounted for 22.94%, and Shenzhen ranked second with 22.21%.
The decline of gross profit margin in important regions will undoubtedly affect the overall profitability of the company. By 2021, China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) has more than 44 million square meters of land reserves, of which 31% is located in East China. If the gross profit margin of projects in East China continues to decline in the future, it is difficult to be optimistic about the overall gross profit margin of the company.
Management does not seem to be worried about this. Huang Junlong bluntly said that the decline of gross profit margin is an overall trend of the industry. The gross profit margin of the projects taken by the company after 2019 is higher than that in the past. These plots will gradually enter the carry forward stage in 2022 and beyond. “At present, it is judged that the gross profit margin will be improved”.
Jiang Tiefeng also said that the rate of return of the company’s future projects will gradually increase. “Since the second half of 2021, the return of the company’s projects has been very prominent, and the gross profit margin has increased significantly”.
In addition, cultivating the second curve of profit growth is also one of the strategic policies of China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) improving profit margin. The management said frankly at the meeting that the company will resolutely promote the “three transformations” strategy, including the transformation from development oriented to equal emphasis on development and operation, from asset oriented to light and heavy combination, and from homogeneous competition to differentiated development.
Turning to the transfer and transfer of assets, Jiang Tiefeng pointed out that the company will firmly hold the core high-quality assets, and the industrial and financial assets with large debt can retain the right to operate with small shares. For the assets that are difficult to improve the operating efficiency and occupy part of the funds, they can be replaced with cash in exchange for better business. “The company is also actively disposing of some inefficient assets recently”.
Prudent acquisition
An important reason for moving assets and looking for the second curve of profit growth is the concern about the trend change of the industry.
Jiang Tiefeng bluntly said that the scale trend of the industry has bottomed out, and it is expected to gradually decline from the top in the future, “it is likely to decline by more than 30%. Therefore, the company will continue to maintain the sales target of 330 billion yuan in 2022, and the new construction plan is 14 million square meters.
In his opinion, in the downward cycle, the value of core asset property services will be further reflected, and creating value is an important direction of China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) future development.
In the context of the “three transformations” strategy, China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) will reserve 10% – 20% of the funds for holding properties, “especially the advantageous business”. However, for the specific land acquisition amount, the management did not disclose more, but emphasized the project profit and risk factors.
In 2021, China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) totally obtained 113 land projects, 15 more than that in 2020, with a total capacity of 15.59 million square meters. In terms of the regional distribution of resources, 59% of them are distributed in the Yangtze River Delta, while the central and western regions and Guangdong, Hong Kong and Macao account for 17% and 13% respectively.
Affected by factors such as land purchase of real estate projects and infrastructure expenditure, the net cash flow from operating activities in China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) 2021 decreased by 5.96% year-on-year to 25.98 billion yuan. At the same time, due to the increase in investment and advances in the purchase and construction of fixed assets and joint ventures, the net increase in cash and cash equivalents was -9.612 billion yuan, a year-on-year decrease of 164.98%.
In 2022, China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) will adhere to the principle of fixed investment based on sales, and the specific situation will be determined according to the company’s liabilities and payment collection capacity. Regions with good market and strong profit certainty will be further cultivated, while regions with low results and obvious weaknesses will withdraw.
In addition, the development goal is to increase the proportion of equity in 2029. In 2021, the company’s equity accounted for about 50.72%, and “this year’s plan is to increase to 60%.” Huang Junlong stressed that the company’s current land acquisition equity ratio needs to be continuously improved, and the proportion of minority shareholders’ equity will decline year by year in the future.
China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) is quite cautious about the merger and acquisition with high discussion at present. Jiang Tiefeng pointed out that the company will compare the acquisition targets with the projects in the open market, and comprehensively consider the factors such as rate of return, certainty and risk, “where the profit is higher and the risk is small, invest in where”.
It also revealed that the company is currently in contact with a number of real estate enterprises. If there is progress, it will disclose that “some projects look good to the outside world, but in fact, it is found that they are not at all”.
With regard to the supervision of pre-sale funds concerned by the market, the management said at the meeting that the company’s supervision funds were 23.1 billion yuan at the end of 2021. It was predicted that “since last year, with the continuous increase of debt defaulting enterprises, the trust between the government and enterprises has been significantly weakened. Local governments are expected to greatly relax the pre-sale funds in the short term due to the pressure of ensuring delivery”.
According to the management, the long-term goal of optimizing the land acquisition strategy is to reduce the company’s debt ratio and optimize the asset structure. By the end of 2021, China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) total interest bearing liabilities amounted to 177.7 billion yuan, of which 43.4 billion yuan will be due within one year, accounting for 24.4%.
In terms of “three red lines”, the company’s asset liability ratio after excluding advance receipts is 61.67%, the asset liability ratio without excluding advance receipts is 68.94%, the net debt ratio is 42.82%, and the cash short debt ratio is 1.25.
