Highlights

• The 17 July profit warning guides for 1H26 attributable and core net profit to come in at Rmb50m-100m, down 90-95% yoy, on a lower JV contribution and a settlement mix skewed towards low-margin completed properties.
   
• We expect 1H26 gross margin to come in at 7.0%, down 3.6ppt yoy, as Rmb160b of the Rmb220b 2026 saleable pool comprises carried-over inventory settling at low single-digit or negative margins.
   
• We cut 2026/27/28 attributable net profit to Rmb67m/Rmb133m/Rmb231m, but expect a more balanced 1H26/2H26 split. We expect 2026 attributable net profit to rise 22% yoy, with interim dividend maintained at a 40% payout ratio. Maintain BUY, with target price decreased slightly to HK$4.50.
   

Analysis

• Yuexiu Property (Yuexiu) announced a profit warning, and we conducted a channel check on 17 July. Key takeaways are as follows. 
   
• Profit warning in 1H26. Yuexiu's 17 July profit warning guides for 1H26 attributable and core net profit to come in at Rmb50m-100m, down 90-95% yoy. This decrease is primarily due to: a) lower investment income from JVs, and b) lower gross profit margins from property development sales, particularly as a large proportion of sales came from lower‑margin inventories. The high base in 1H25 is also a key reason for the sharp yoy decline. 
   
• Revenue declines despite deferred deliveries in 2H26. Contracted sales fell 17.9% yoy to Rmb50.5b in 1H26, but the company remains on track to achieve its full-year contracted sales target of over Rmb100b in 2026. We expect 1H26 revenue to decline by 20-30% yoy from Rmb47.6b, as the delivery of several projects has been deferred to 2H26. As a result, we expect the full-year revenue decline to narrow to 6.3% yoy as the deferred deliveries will be recognised in 2H26, although lower contracted sales will result in a decline in full-year revenue. 
   
• Pre-2021 inventory continues to weigh on gross margin. We expect gross margin to decline 3.6ppt yoy from 10.6% in 1H25 to 7.0% in 1H26. The margin contraction is mainly attributable to the company's sales mix. Of the roughly Rmb220b of saleable resources in 2026, around Rmb160b comprises carried-over inventory, with about Rmb60b coming from projects launched before 2021 (about 27%). The inventory before 2021 is expected to settle at low single-digit or even negative gross margins. Hence, continued destocking efforts are likely to put further pressure on gross margins in 2H26 and 2027. We forecast a 2026 gross margin of 5.5%.