Key points of investment
Event: The company announced its 2023 interim results. In the first half of the year, we achieved revenue of 7.70 billion yuan, an increase of 1.0% year on year; net profit from return was 84 million yuan, down 20.7% year on year, and performance fell short of expectations.
Gradually get rid of real estate-related transactions and optimize the revenue structure. In the first half of 2023, the downturn in the real estate market led to a sharp decline in related business revenue: the company's total non-cyclical business revenue increased 7.2% year on year, and the revenue share increased to 92.3%; among them, property management business revenue increased 7.4% year on year, and revenue share increased to 68.4%. However, revenue from extended value-added business fell 40.4% year on year, and the share of revenue fell 5.3 pct to 7.7% year on year. At the same time, revenue from home improvement services from value-added services for owners decreased by 48.6% year on year. We believe that the company's basic market is stable. After gradually getting rid of its dependence on real estate-related transactions, it is expected to return to a growth trajectory and achieve sustainable high-quality development.
The gross margin of all businesses has declined to varying degrees, putting pressure on performance. The company achieved a recovery in operating cash flow in the first half of 2023, but overall gross margin fell 6.5 pct to 20.4% year-on-year. The gross margin of all businesses other than urban services declined to varying degrees year on year. Among them, (1) gross margin of property management services fell 2.4pct to 18.9% year on year, mainly due to the increase in the share of low-margin public construction projects and the increase in labor costs brought about by improving project quality; (2) gross margin of value-added services for owners fell 20.6 pct to 48.2% year on year, mainly due to the impact of the downturn in real estate and the increase in investment brought about by improving the layout of the industrial chain; (3) gross margin of extended value-added services fell 16.2 pct to 19.7% year on year, mainly due to the increase in gross margin Demand for developers' services has declined, but related business costs are still high. In terms of fee control, the company's sales management rate remained stable at 5.7%, and impairment provisions for trade and other receivables decreased by 83.4% year-on-year to 50 million yuan.
Market expansion continues to take the lead, and the layout of urban services is deepening. As of June 30, 2023, the company's pipe area and contract area reached 580 million square meters and 760 million square meters respectively. 83.3% of the pipe area came from third-party projects. The company added 30.62 million square meters of contract area in the first half of 2023. The company insists on focusing on a high-energy city strategy and is based on annualized contract amounts. Tier 1 and 2 cities accounted for 78.1% of new development projects in the first half of the year, and the average expansion price was 2.1 yuan/month/square meter. The company has achieved full business coverage. Non-residents accounted for 58.8% of property management service revenue in the first half of 2023. With its experience in public service, the company continues to deepen its urban service business layout. Currently, the urban service business has entered 47 cities, with a total number of projects reaching 106.
Profit forecasting and investment ratings: The company's performance in the first half of 2023 was under pressure due to a decline in real estate-related business revenue and a sharp drop in gross margin. However, the company has excellent market-based expansion capabilities, and a stable basic market. It is expected to return to a growth trajectory after getting rid of dependence on real estate-related transactions. Since the company's profit margin is still at the bottom of the grinding stage, we lowered its net profit for 2023/2024/2025 to 19.4/21.2/23.1 billion yuan (previous value was 20.6/21.5/2.65 billion yuan), the corresponding EPS was 1.37 yuan/1.49 yuan/1.63 yuan, and the corresponding PE was 3.3X/3.1X2.8X respectively, maintaining the “increase in holdings” rating.
Risk warning: Market-based expansion fell short of expectations; profit margins exceeded expectations and declined.