Maintain "Neutral" and reduce TP to HK$5.60. We revise down our forecasts on A-Living's (the "Company") 2023F-2025F EPS to RMB1.273, RMB1.413 and RMB1.556, respectively, which represents a CAGR of 6.3% during 2022-2025F. Accordingly, we revise down our TP to HK$5.60, by applying 4.0x 2023F PE multiple. Given the lackluster growth and ongoing market concerns on its related-party risk, we maintain the investment rating of "Neutral" on the Company.
Lackluster 1H2023 results. A-Living's top line growth slowed down with YoY growth of only 1.0%, reaching RMB15.4 bn in 1H2023. 1H2023 overall GPM declined by 6.5 ppts to 20.4%, but slightly rebounded from that of 17.2% in 2H2022. Selling and marketing expenses increased by 79.2% YoY in 1H2023, mainly due to increasing cost in market expansion activities and development of new VAS business, such as group meal. Due to the squeezed margin and much higher selling and marketing expenses, the Company's 1H2023 shareholders' net profit finally recorded RMB839 mn, down by 20.7% YoY. The Company announced interim dividend for the first time at RMB0.025/share, given its net operating cash inflow in 1H2023. According to the management, the Company will adopt a more flexible dividend policy depending on its cash position.
Softening non-cyclical business growth. The Company's non-cyclical business (basic property management, property owners VAS and city services) recorded growth of 7.2% YoY in 1H2023, but at a softening trend. Given the down cycle of property sales, 67.3% of the Company's new contracted GFA came from public facilities in 1H2023. However, considering the two natures of public facility management: 1) the thinner GPM; and 2) less room for development of VAS, we do not expect a growth in its non-cyclical business in the short run.
The related-party risk is still an overhang. The Company's total accounts receivable in 1H2023 continued to grow by 1.1% YoY to RMB10.829 mn. After a significant write-off of accounts receivable last year, we believe A-Living's related-party risk has not been fully removed and still is one major concern of investors. The Company is on the way of chasing back the trade receivables from its related parties, and accepting the unsold property assets for settlement is still an important way.
Upside risks: 1) Improvement in profitability; 2) faster growth in property owners VAS and city services; and 3) liquidity improvement from its parent. Downside risks: 1) Slower growth in GFA expansion; 2) large impairment loss from accounts receivable; and 3) labor cost hikes.