Shimao Service 1H23's performance was slightly better than market expectations

Shimao Services announced 1H23 results: revenue fell 4% year on year to 4.10 billion yuan; net profit from Gimao increased 11% year on year to 155 million yuan, slightly better than market expectations.

Cash flow performance and receivables management results were outstanding. The company recorded a net operating cash flow inflow of 350 million yuan in the first half of the year (1H22 was an outflow of 2.4 billion yuan), which basically covered the company's core net profit of 368 million yuan after deducting non-cash accounts such as impairment and amortization. In terms of receivables, the total amount of accounts receivable from 1H23's related parties remained flat compared to the end of 2022, and the total amount of total receivables increased by only 6% compared to the end of 2022.

We believe that the relevant outstanding performance is mainly due to the company's high-frequency tracking of cash flow and efforts to improve the efficiency of cash management from headquarters to the city.

The business volume of related parties fell to a low level. The company disclosed that in the first half of the year, related party revenue recorded 218 million yuan, accounting for about 5% of total revenue. Related parties' related business exposure had fallen to a low level.

Highlights and pressures coexist in core business development. On the basic property management side, in the first half of the year, the company's newly developed third-party contract had an annualized saturated revenue of 727 million yuan, an increase of 21% over the previous year. Among them, as the share of high-energy cities increased (19 core cities accounted for 55% of the contract amount), the saturated revenue per square meter increased 40% year-on-year; however, under the continuous decline, 1H23's management area remained flat and recorded 261 million square meters. In addition, the company's gross property management margin fell 5.6ppt to 20.7% year-on-year in the first half of the year. On the community value-added services side, old-age services (revenue +45%) and community asset management services (+22% YoY) recorded a certain increase, but businesses such as smart scenario services, beauty homes, and new retail saw a significant decline in real estate and macroeconomic pressure. In the end, overall revenue from the community value-added services sector fell 24% year on year.

Development trends

The company proposes to implement diversified development under the premise of high-quality growth, and focuses on the implementation performance of subsequent strategies. The company pointed out that under the principle of high-quality growth, its target priority is “cash flow, gross operating profit, period expenses, and scale growth,” and clarified a series of specific goals, such as that the ratio of operating cash flow covering core net profit is not less than 0.8, and that the sales management expense ratio is further reduced on the basis of mid-term performance. Under the premise of high-quality growth, the company also indicated that it will prioritize implementation of strategies such as “related diversification” to achieve development.

We recommend focusing on the sustainability of the company's cash flow performance during the year, and further focusing on its independent growth momentum with the support of front-end outreach capabilities and continuous cultivation of multiple platforms.

Profit forecasting and valuation

We raised net profit for 2023 and 2024 by 11% and 11% to 469 million yuan (reversed losses year on year) and 539 million yuan (+15% year on year), mainly considering that the company's total receivables increased and the impairment margin was better than expected. Maintaining a neutral rating, the target price was raised by 6% to HK$1.9 per share (corresponding to 9 times the 2023 price-earnings ratio and 24% upside) to reflect profit forecast adjustments. The company traded 7.2 times the 2023 price-earnings ratio.

risks

The gross margin of basic property management exceeded expectations and declined; capacity building for community value-added services and revenue growth fell short of expectations.