The first half of 2022 results are in line with market expectations

The company announced its results for the first half of 2022: revenue rose 54% year-on-year to 3.16 billion yuan, and net profit increased 33% to 380 million yuan, in line with market expectations.

While the tube area continues to expand rapidly, the bidding extension continues to perform well under the pressure of the epidemic. By the end of the first half of 2022, the company's area under management was 208 million square meters, an increase of 60 percent over the same period last year, of which the proportion of non-residential area increased by 4.9 percent to 38 percent, while the contract area reached 291 million square meters, an increase of 33 percent over the same period last year. In the first half of the year, the company's third-party extension contract area is about 2000 million square meters, and the corresponding saturated annual income is about 570 million yuan, which is basically the same as that in the same period last year, and still maintains a strong extension intensity under the pressure of periodic epidemic in the Yangtze River Delta region.

Value-added services have maintained steady development under environmental pressure as a whole. Affected by the epidemic and the real estate sales environment, part of the BU business of the company's community value-added services was under pressure, such as some home-to-home services, rental services, etc., and the revenue and gross profit of community value-added services increased by 5% and-4% respectively in the first half of the year compared with the same period last year. Revenue from non-owner value-added services increased by 38% in the first half of the year compared with the same period last year, continuing steady growth, but due to the real estate environment, gross profit fell 4.1% year-on-year, while gross profit increased 17%.

The performance of cash flow is under some pressure, and the company increases its repurchase and dividend efforts in the context of the downward market. In the first half of 2022, the company's operating cash flow was 130 million yuan (0.3 times the return net profit), and trade receivables increased by 58% to 1.42 billion yuan compared with the end of 2021, of which 21% and 79% came from related parties and third parties respectively. In the downward phase of the market, the company stepped up its buybacks and dividends, repurchased a total of 4.14 million shares so far this year, and declared an interim dividend of HK $0.074 per share for the first time, with a dividend ratio of 30 per cent.

Trend of development

Multi-wheel kinetic energy is expected to continue to drive the steady growth of enterprises in a low base. Xu Hui Yongsheng management scale base is not high and the marginal increment is relatively large. We estimate that the incremental area from parent company project transformation, new development project delivery, stock project expansion and other channels in 2022 is expected to exceed 60 million square meters, driving the management area to achieve more than 35% year-on-year growth on the basis of 170 million square meters at the end of 2021. We expect that the company will continue to promote the steady development of diversified businesses, including owner value-added services, urban services, non-owner value-added services and so on. At the same time, we expect that scientific and technological progress and management system optimization are still expected to continue to promote operational efficiency and further support the growth of enterprises. As the general environment gradually stabilizes, we expect the company to increase the account call work of small owners, B-end and government-side customers, and gradually restore operating cash flow to a relatively healthy state.

Profit forecast and valuation

Taking into account the impact of environmental pressure on various businesses, we cut profits by 10% and 17% in 2022 and 2023 to 790 million yuan (up 28% year-on-year) and 1 billion yuan (up 27% year-on-year). At the same time, taking into account the negative changes in the capital market's risk appetite for private real estate related property enterprises under the pressure of the real estate development market, we lowered the company's target price by 47% to HK $8.0, corresponding to 53% upside space and 15 times the 2022 target price-to-earnings ratio. Maintain an industry rating that outperforms. The company currently trades at 9.9 times 2022 earnings and 7.8 times 2023 earnings.

Risk

The expansion of third-party projects falls short of the expected risks, and the BU promotion of community value-added services falls short of expected risks.