Key points of investment

Guangzhou state-owned enterprises divested the real estate business and went back to the fray: Zhujiang Co., Ltd. is a state-owned real estate development enterprise in Guangzhou, and the majority shareholder is Guangzhou Zhujiang Industrial Group. The company issued an announcement on April 24, 2023, stating that the restructuring was basically completed: assets and liabilities related to the real estate development business were put out at a price of 2.8 billion yuan, and 100% of the shares of Guangzhou Pearl River City Management Service Group Co., Ltd. (“Pearl River Urban Services”) were placed at a price of 780 million yuan at the same time. After the restructuring, the company's main business will be changed to property management and cultural and sports operations.

Pearl River City Service has strong external expansion capabilities and outstanding advantages in the urban service industry: As of August 2022, Pearl River City Service has managed a total of 366 projects (141 residential buildings, 208 public buildings, 17 stadiums), with a total management area of 28.45 million square meters. Third-party expansion projects account for nearly 75% of the 349 residential and public construction projects, and have excellent market expansion capabilities. In terms of urban services: Pearl River City Service is a leading domestic cultural and sports track management company, and stadiums rank first in terms of management and construction. At present, a total of 20 stadiums have been signed, with assets under management amounting to 20 billion yuan. The company has an obvious first-mover advantage. Currently, it is one of the few professional companies in China that has successfully operated and guaranteed large-scale events at the world-class, Asian, national, provincial and municipal levels. Since the average operating period of the stadium project is 15-17 years, the company's business has stable cash flow and strong sustainable development capabilities.

Pearl River City Service's gross margin is stable, and performance promises to guarantee the company's future profits: from January to August 2022, Pearl River City Service's two main businesses, property management and cultural and sports operations, achieved revenue of 650 million yuan and 160 million yuan respectively. The gross margins were 17.3% and 44.8% respectively, maintaining a high level in the industry. On January 19, 2023, Zhujiang Co., Ltd. and Zhushi Group signed a “Performance Compensation Agreement”, promising that in 2023-2025, Zhujiang City Service's annual net profit will not be less than 68 million yuan, 74 million yuan, and 79 million yuan respectively, laying the foundation for Pearl River Co., Ltd.'s future performance release.

Strengthen group collaboration, take advantage of the urban village policy, and business expansion can be expected: as the company's major shareholder, Zhushi Group has become a large-scale wholly owned state-owned city operation integrated service group in Guangzhou, the largest state-owned housing rental platform and urban renewal state-owned land preparation platform in Guangzhou, and the only enterprise in the entire urban construction and operation industry chain among state-owned enterprises in Guangzhou. The subsidiary's urban renewal platform, Guangzhou Urban Renewal Group, has completed the expropriation and renovation of major roads and surrounding areas in central Guangzhou city center for more than 30 years, developing multiple residential areas and small office buildings; Guaranteed room project. After the restructuring, Pearl River Co., Ltd. has strengthened collaboration with Zhushi Group. In this round of urban village renovation in megacities, Pearl River Co., Ltd. has the opportunity to undertake property services for a large number of parent companies and brother unit projects to help further expand the scale of management.

Profit forecast and investment rating: We expect the company's net profit for 2023-2025 to be -0.64/0.82 billion yuan, respectively, the corresponding EPS is -0.07/0.10/0.11 yuan, and the corresponding price-earnings ratio is -53.6/41.5/36.0 times. For the first time, coverage will be given a “buy” rating.

Risk warning: The scale of market-based expansion fell short of expectations; the implementation of urban village renovation policies fell short of expectations; the real estate market sentiment exceeded expectations and declined.