We continue to like Dexin’s strategy to deepen its penetration in Hangzhou/YRD regions and expand its scale at a reasonable pace (15% YoY). The decline in 2020 core earnings was merely due to the strategical change to fast asset turnover and scale expansion in 2017/18 and we expect an improving earnings in 2021-22E (11/15% YoY) driven by top line growth and limited downside in GPM/MI. With stable balance sheet (yellow category, liability/asset ratio at 75%) and improving attributable ratio, Dexin may continue to deliver 15/20% sales/attributable sales CAGR in 2020-23E. Maintain Buy rating.
- Attributable sales growth CAGR to reach 20% in 2020-23E. Riding on the long-term development of Hangzhou (29% of its land bank)/YRD region (79%) and abundant RMB240bn sellable resources, management targets 15% sales CAGR in 2020-23E reaching RMB100bn. In particular, the target for 2021E is RMB73bn (+15% YoY) by assuming 60% sell-through rate. However, with 2020 sell-through rate of 80% and strong sales sentiment in 1Q21 (+300% sales growth in 2M21), we believe it may reach RMB80bn in 2021E setting a good base for RMB100bn. More importantly, management is trying to improve attributable ratio from 40% in 2020 to 50% in 2023 given that the attributable % of current land bank is >50%. This would be the industry trend as the scale goes up. Therefore, we estimate attributable sales growth to reach 20% CAGR.
- We estimate earnings to bounce back from 2020: The decline in 2020 core earnings was mainly due to GPM erosion and MI. For GPM erosion, the 25% level is in line with the industry and we think the downside is limited to 20-23%, as its 2017/2018 low-margin projects have been partly digested. For MI, the 2020 ratio was already 47%, close to Dexin’s consolidated ratio. We think the future growing fuel would be the top line growth which management guided RMB20bn in 2021E (+25% YoY) and RMB28bn in 2022E (+40% YoY).
- 2020 results recap: Dexin delivered a strong revenue growth of 65% YoY to RMB15.7bn thanks to the fast-growing sales in 2017/18. However GP Margin declined to 25% in 2020 vs. 32%, which is in line with the industry trend. Due to positive costs saving, SG&A/Revenue ratio dropped by 5ppts YoY to 8% but this has been offset by declining JV profits. Core earnings reached RMB1.0bn in 2020 (-25% YoY) mainly due to higher MI ratio to 47% (vs. 31% in 2019). Company declared a full-year dividend of RMB0.11/share in 2020.
- Maintain Buy: We revise up its 2021/22E revenue by 18/42% to reflect its fast sales growth but adjust down its GPM to 20-23% level. Therefore, we expect 2021/22E core earnings to grow 11/15% YoY, respectively. TP unchanged.
