23H1 revenue grew rapidly year over year, maintaining a “buy” rating

The company released its semi-annual report on August 25. 23H1 achieved revenue of 1.19 billion yuan, +43% year on year, and net profit of 230 million yuan, +21% year on year. Considering the decline in the company's gross margin, we lowered the gross margin forecast for 5S value-added services and non-owner value-added services. We expect EPS to be 1.87/2.41/3.04 yuan in 23-25 (previous value: 1.98/2.58/3.31 yuan). The average 2023PE for comparable companies is 16 times (Wind unanimously expected). Although the quality of the company is excellent, the scale is small and the liquidity in the secondary market is low. We think the company's reasonable 2023PE is 15 times, and the target price is 30.18 HKD (previous value is 38.38 HKD, based on 17 times 2023PE), maintaining a “buy” rating.

Revenue grew rapidly, with increased investment, real estate adjustments, and business structure changes, leading to a decline in gross margin 23H1. The company's revenue continued to grow rapidly. Among them, basic property management was +34% to 7.2 million yuan, mainly due to management area +37% to 48.71 million square meters; 5S value-added services were +212% to 190 million yuan, mainly due to the rapid growth of premium services (decoration). The year-on-year growth rate of net profit was lower than revenue, mainly due to gross margin of -4.8 pct to 26.7% year on year, of which: 1. Basic property management improved quality and investment, and gross margin was -1.5pct to 19.2% year on year; 2. Non-owners' value-added services were affected by adjustments in the real estate market, service charges were lowered, and gross margin was -5.4 pct to 40.5% year on year; 3. 5S value-added services due to the rapid increase in the proportion of renovation business with relatively low margin, gross margin was 36.7 pct to 34.8%. The company is still actively seeking withholding tax concessions, and if implemented, it is expected to have a positive impact on the net profit of the parent company in '23.

Affiliated housing enterprises provided stable support, and continued to strengthen the deepening layout of key cities 23H1 Affiliated housing enterprise Binjiang Group (002244 CH) brought the company a net increase of 2.54 million square meters in management area, +70% over the same period; sales amount +35% to 92.6 billion yuan, 23 new lots were added. It is expected that it will continue to provide the company with a large number of high-quality Zhejiang projects, mainly in Hangzhou, in the future. Furthermore, the company's market-based expansion is progressing steadily. We expect the 23H1 market expansion contract area to exceed 3 million square meters. We will continue to strengthen our in-depth development in cities such as Hangzhou, Jinhua, Jiaxing, Shaoxing, and Ningbo, where the Binjiang Group has a large layout, relying on benchmark projects to “take root”. As of 23H1, the company's administrative area in Hangzhou was 30.12 million square meters, accounting for 62%; third parties accounted for 56% of the pipe area compared to the end of '22.

The hardware business continues to expand, and the scale of revenue to be carried forward is large

23H1's Youju Service achieved revenue of 120 million yuan, +1765% year-on-year, and 22H2 +9% year-on-year, mainly due to the rapid expansion of 22H2's hardware and hardware business, which is mainly self-operated. As of 23H1, the company's 5S value-added service contract debt was 1.16 billion yuan. We expect it to be mainly advance payments from the hardware and installation business. In the future, as the renovation project progresses, it is expected that it will gradually be converted into revenue, which means there is still plenty of room for revenue growth for Youju Service.

Risk warning: Related to the operating risks of housing enterprises, the risk of market expansion and declining profitability, 5S value-added services fell short of expectations.