Incident: The company's revenue for the first half of 2023 was +9%, and net profit was +30%. Xincheng Yue Service announced its 2023 interim results announcement. Revenue was 2.68 billion yuan, up 8.7% year on year, gross profit was 7.2 billion yuan, up 0.2%; gross margin was 26.8%, down 2.2 pct from the previous year; net profit was 290 million yuan, up 30% year on year. As of June 30, 2023, the company had a management area of 210 million square meters (an increase of 10.2 million square meters over the end of 2022), of which the Xincheng Department had a management area of 100 million square meters and a third-party project had a management area of 110 million square meters.

Comment: Special tracks are growing strongly, market expansion highlights are highlighted, business structure continues to be optimized 1) Special tracks are growing strongly, and key business formats continue to break through. The company's unique layout of value-added service segments, including group meals, elevator maintenance, etc., 2023H1 value-added services achieved revenue of 7.1 billion yuan, up 13.4% year on year, and gross margin was 33.9%, of which group meal business achieved revenue of 220 million yuan, up 55.3% year on year; facility management business achieved revenue of 130 million yuan, up 23.1% year on year. Together, the two major business revenue accounts for about 50% of the value-added service sector. As an important starting point for promoting the company's special business and logistics strategy, group meal+elevator maintenance and property management business are highly synergistic. Due to rigid demand, with the characteristics of sustainable business, and large market space, it is expected to provide strong support for the company's future growth.

In terms of basic property management, 10.66 million square meters of new projects were taken over in the first half of 2023, of which projects from third parties accounted for 48%; in terms of business format, the company continued to make breakthroughs in the non-residential segment. In the first half of the year, it added a number of high-quality hospital projects, including Guizhou Third People's Hospital and Tianjin Tanggu Anding Hospital. Some projects achieved a comprehensive property+group meal service model. In the first half of the year, the hospital industry achieved revenue of 82 million yuan, +107.6% year-on-year.

2) The business structure continues to be optimized, and talents are reserved for long-term development. The 2023H1 company's basic property management/community value-added, smart park/developer value-added business revenue was 63.2%/26.4%/4.5%/5.9%, respectively, real estate-related business (smart park and developer value added) accounted for 10.4% of total revenue, 8.2% gross profit, a decrease of 7.8pct/4.8pct over the same period of the previous year, and the company's business structure continued to be optimized. The company's administrative expenses in the first half of the year were about RMB 215 million, an increase of about 3.1% over the previous year. The main reason was that the company continued to grow steadily in size, reserve talents for the rapid development of major logistics-related businesses, and release of subsequent talent dividends. Overall business development and operating efficiency are expected to improve.

Profit forecasting, valuation and rating: The company's non-cyclical business is developing rapidly, special value-added services are growing strongly, key non-residential business continues to make breakthroughs, the business structure is optimized, the impact of real estate-related business continues to decrease, and risks are better controlled; at the same time, the impairment impact of investing in US dollar bonds is no longer dragging down performance, and the subsequent development is steady, moderate and positive. Considering the company's business restructuring, the revenue and profit share of the value-added business of smart parks and developers continues to decline. We adjusted the company's gross profit forecast for 2023-2025 to 600 million yuan (-4%) /720 million yuan (-0.7%) /800 million yuan (-1.8%). The corresponding EPS is 0.69/0.83/0.92 yuan, PE is 6/5/5 times. The company is generally well-oriented. The current valuation is attractive and maintains a “buy” rating.

Risk warning: Outreach fell short of expectations, profit margins declined due to increased market competition, and real estate-related businesses continued to have an impact.