Maintaining the “neutral” rating, the target price was lowered to HK$5.60. We lowered our earnings forecast for Ya Life Services (the “Company”) for 2023-2025 to RMB 1.273, RMB 1.413, and RMB 1.556, corresponding to a compound annual growth rate of 6.3% between 2022-2025. Accordingly, we used a price-earnings ratio of 4.0 times for 2023 and lowered the target price to HK$5.60. Given the weak growth of the company and the market's concerns about the risks of its affiliates, we maintain the company's “neutral” investment rating.
Results for the first half of 2023 were weak. In the first half of 2023, Ya Life Service's total revenue growth slowed, with a year-on-year increase of only 1.0% to RMB 7.7 billion. Overall gross margin fell 6.5 percentage points to 20.4% in the first half of 2023, but there was a slight recovery from 17.2% in the second half of 2022. In the first half of 2023, sales and marketing expenses increased 79.2% year-on-year, mainly due to market expansion activities and increased costs for developing value-added service businesses (such as group meals). As profit margins were squeezed and sales and marketing expenses increased sharply, the company's net profit for shareholders in the first half of 2023 finally recorded RMB 839 million, a year-on-year decrease of 20.7%. Given the net operating cash inflow for the first half of 2023, the company announced an interim dividend of RMB 0.025 per share for the first time. Management said the company will adopt a more flexible dividend policy based on its cash position.
Non-cyclical business growth is slowing. The company's non-cyclical business (basic property management services, value-added services for owners, and urban services) recorded 7.2% year-on-year growth in the first half of 2023, but the trend has slowed. Given the downward cycle in residential sales, 67.3% of the company's newly signed contract area in the first half of 2023 came from the public construction category. However, considering the two major characteristics of public property management: 1) thin gross profit margin; 2) less room for value-added service development, we do not expect its non-cyclical business to grow significantly in the short term.
Related party risk still exists. In the first half of 2023, the company's total accounts receivable amounted to RMB 10.829 billion, an increase of 1.1% over the previous year. After a large amount of accounts receivable impairment preparations was made last year, we believe that the risk of the company's related parties has not yet been completely eliminated, and it is still one of the main issues investors are concerned about. The company is recovering accounts receivable from related parties, including accepting unsold property assets as a settlement method.
Upside factors: 1) improved profit margins; 2) faster development of value-added services for owners and urban services; and 3) improved liquidity of parent companies. Downside risks: 1) slow growth in pipe area; 2) large amounts of bad debt; and 3) increased labor costs.