We think Dafa’s business model has been further optimised as 1) strategy-wise, it will concentrate more on YRD and Chengdu/Chongqing regions instead of national expansion so this could bring regional advantage and operating leverage. 2) Operation-wise, Dafa has focused on acquiring lands with GFA <200k sq m so it could utilise its high-asset-turn model and quickly achieve cashflow breakeven. 3) Maintain a relatively short land bank life of 2-2.5 years for a healthy balance sheet. Therefore, we think this may drive sustainable sales growth (30% YoY in 2021E) and earnings recovery in the future. As for 2021E, management guided 15-20% top/bottom line growth with GPM at 21-22% after 2020 missed on MI. Maintain Buy rating.
- Transition from 1+5+X to 1+1+X would lead to sustainable profitability recovery and more optimal asset turnover model. We like management’s key strategical change from national expansion to focusing on YRD and Chengdu/Chongqing regions. Firstly, the market size of the two regions can support Dafa’s road to RMB50-100bn sales. Secondly, the high asset turnover model could work and optimize given most of the lands are supplied in the public channel. This would suit Dafa’s key strength. Lastly deep-root strategy would also support its profitability recovery due to operating leverage such as SG&A and funding costs.
- Land bank – Chengdu became the centre of expansion. In 2020, Dafa has bought 22 plots with total GFA of 2.8mn sq m (RMB16bn). 4 plots were acquired in Chengdu which took 18% of total, just behind its home base Wenzhou. So this has improved Chengdu/Chongqing exposure to 13% of its 6.7mn land bank and will serve as a good diversification due to robust demand. YRD will remain the key focus and contribute 80% of the land bank.
- Sales may reach RMB40bn (+30% YoY) in 2021E. After achieving 44% sales growth in 2020 to RMB30.3bn, the Company set 2021E target at RMB36bn (+18% YoY). We think it’s slightly conservative given that 1) the Company has prepared RMB65bn sellable resources with 80% from new projects/phases. So 55% sell through rate would achieve the target vs. 70% in 2020. 2) 1Q sales has surged 256% YoY to RMB10.8bn or 30% of annual target. 3) 80% of sellable resources would be located in YRD region. Therefore, we think Dafa may beat its guidance to achieve RMB40bn in 2021E. However, the attributable sales ratio may stay at the current level of 45% (2020) given similar ratio at land acquisitions and reserves.
- Maintain Buy: We keep earnings and TP unchanged.
- 2020 results: Improving B/S into green category but earnings missed on MI: Dafa delivered a strong revenue growth of 24% YoY to RMB9.2bn thanks to the fast-growing sales in 2017/18. GP Margin declined by 2ppt YoY to 21% in 2020 in line with the industry trend. Net profits (before MI) grew 19% YoY to RMB7.2bn, however rapid increase in MI has diluted the attributable earnings to Dafa which was RMB339mn (-34% YoY). Company declared a full-year dividend of RMB0.08/share in 2020 (20% payout ratio). On the B/S side, it has met all the “three red lines” requirements with net gearing at 50%, cash/ST Debt at 1.4x and liability/asset (excl. pre-sales) at 68.6%.
