Company's 1H23 earnings missed with NP grew at 21% YoY vs. original FY target of 30% given 1) late approval of withholding tax deduction which could have sent NP growth to 29% in 1H23. 2)GP margin declined 4.8 ppts to 26.7% mainly driven by revenue structure change in community VAS. We like the company for its stable parentco., good cash flow and high dividend pay-out ratio, but lowered our forecast in NP by 4-11% in FY23-25E to reflect its pressure on both third-party expansion and two VAS segments. Maintain BUY with new TP of HK$ 34.33, representing 16x 2023E PE.
1H23 earnings missed due to late withholding tax relief and margin contraction. Company delivered 43% YoY growth in revenue to RMB 1.2bn in 1H23, and net profit grew 21% YoY to RMB 231mn, missing our expectation. This was mainly due to 1) withholding tax deduction approval was later-than-expected. Company's dividend paid to non-PRC receivers was subject to a withholding tax rate of 10%, the on-going tax deduction application will lower the rate to 5%, representing ~RMB 21mn impairment reversal. The NP growth could reach 29% if application approved earlier. 2) GP margin declined 4.8 ppts to 26.7% mainly caused by community VAS structure change.
VAS growth under pressure. Non-owner VAS segment recorded revenue of RMB 279mn, with growth slowed 19% YoY in 1H23 from 45.7% in 1H22 and 28.8% in FY22 as developers continue to cut expense due to liquidity strain. Community VAS booked 212% YoY growth in revenue but the GP margin was largely contracted to 34.8% in 1H23 from 71.5% in 1H22 and 48.3% in FY22 as the housing brokerage service and home living services with high GP margins were impacted by slow recovery of property market and consumption, and company puts more efforts on soft furnishing business with lower margin that leads to proper growth in revenue, but a big decline in GP margin. The trend is likely to continue in 2H23 in our view.
Operating cash flow remained good. Company's operating cash flow increased 39% YoY in 1H23 thanks to less PM fee delay in high-end projects and more revenue contribution from services with fee collected in advance like soft furnishing.
Maintain BUY and cut TP by 4% to HK$ 34.33. We like the company for its less connected transaction, stable parentco., good cash flow and high dividend pay-out ratio at 60%, Maintain BUY. We lowered our forecast on net profit by 4-11% in FY23-25E (25% CAGR) to reflect company's pressure on third-party expansion among intensifying competition and struggling VAS business mentioned above. We come up with a new TP of HK$ 34.3, representing 16x 2023E PE. The company is currently trading at 10x 2023E PE. Catalysts: withholding tax impairment reversal, Stock Connection inclusion. Risk: lower-than-expected property market recovery.
