Event: Sunac Services's revenue in the first half of 2023 was-15% compared with the same period last year, and its net profit was 340 million yuan. Sunac Services announced its mid-term results in 2023, with income of 3.396 billion yuan during the reporting period, down 15% from the same period last year, and gross profit of 840 million yuan, down 25% from the same period last year. The net profit is about 340 million yuan, compared with a loss of 751 million yuan in the same period last year. As of June 30, 2023, the contracted area of property management is 396 million square meters, while the area under management is 263 million square meters, with residential accounting for 82% and non-residential accounting for 18%.

Comments: adhere to the principle of marketization of related business, continue to focus on the core first-and second-tier cities 1) continuous adjustment of related business, improve the overall operational security. As the related parties were affected by the continuous decline of the real estate industry, the company began to significantly reduce the value-added service business of related parties in the second half of 2022. In the first half of 2023, the non-owner value-added service income was 203 million yuan, a decrease of 77% over the same period last year, accounting for 6.0% of the income. Compared with the same period last year, the gross profit decreased by 32.01 million yuan, a decrease of 200 million yuan. The revenue of business operation and management services was 22 million yuan, down 80% from the same period last year, and the gross profit was 3.2 million yuan, a decrease of 79 million yuan over the same period last year. The decrease was mainly due to the company delaying revenue recognition for some related party businesses with low payback rates. The company shrinks the value-added business of related party non-owners, reduces the impact of real estate related party business, and improves operational safety.

2) focus on the core main business and core cities, and optimize the business structure of community life. The company adjusts its business strategy to further focus on core cities and core products. 45 core first-and second-tier high-energy cities account for 80% of the total managed area, while actively expanding projects around the core cities, benefiting from the increase in managed area. in the first half of the year, the company's basic material management revenue increased by 8.1% compared with the same period last year. At the same time, the existing community life services were adjusted, focusing on the needs of owners in core cities, providing categories in which the company had advantages, and taking the initiative to shrink marginal products. Revenue from community life services in the first half of the year decreased by 16.3% compared with the same period last year. Among them, revenue from convenient services (including housekeeping and community retail), which accounts for a relatively high percentage, decreased by 21.8% compared with the same period last year.

3) strengthen the management of related party accounts receivable. As of June 30, 2023, the total amount of related party trade receivables of the company was about 3.24 billion yuan, which was about 131 million yuan lower than that at the end of 2022. The impairment provision for related party trade receivables was 56 million yuan more than that at the end of 2022. The increase and impairment provisions for related party trade receivables have been basically controlled. The follow-up company will continue to adhere to the principle of marketization of related party business, adjust related party business and control the further increase of the balance of trade receivables.

Profit forecast, valuation and rating: as the related party Sunac China is affected by the downside of real estate, which affects the speed of the company's development, the related business income and profits have been greatly adjusted, and the community life service and commercial operation business have shrunk. The recovery situation still needs further observation. We downgrade the company's profit forecast, and the impairment of related party receivables will be reversed in the first half of 2023, which is better than we expected. The impact of impairment of accounts receivable on profits in 2023 is reduced Taking all things into consideration, we predict that the company's net profit from 2023 to 2025 will be 620 million yuan / 690 million yuan (- 6%) / 780 million yuan (- 10%), corresponding to an EPS of 0.20, 0.23 and 0.25 yuan, and the current share price will be times higher than that of PE in 10-9-8, maintaining the "overweight" rating.

Risk hint: external extension is not as expected, and there is uncertainty about related business operating income and impairment.