Incident: The company released its 2023 annual report. In 2023, the company achieved operating income of 15.627 billion yuan, a year-on-year increase of 19.99%; net profit to mother of 736 million yuan, an increase of 23.96%; EPS in 2023 was 0.69 yuan/share; and the dividend plan was to distribute a cash dividend of 1.7 yuan for every 10 shares.

Net profit to the mother increased steadily: in 2023, the company achieved operating income of 15.627 billion yuan, an increase of 19.99% over the previous year, and net profit to the mother of 736 million yuan, an increase of 23.96% over the previous year. In terms of profitability, the company's overall gross profit margin was 11.56%, down 0.28 pct from 2022, mainly due to a decrease of 0.57 pct to 10.01% in the company's main property management business. The company's net margin was 4.73%, up 0.36pct from 2022. The reasons for the increase in net interest rates are: 1) income from changes in fair value was $06 billion, compared to -$08 billion in 2022, achieving positive gains from fair value changes in 2023; 2) non-operating income increased to $15 million, and non-operating expenses fell from $15 million in 2022 to $01 million. In terms of cost control, the sales expense ratio, management expense ratio, and financial expense ratio were 0.6%, 3.87%, and 0.4%, respectively, an increase of 0.06 pct, an increase of 0.27 pct, and a decrease of 0.32 pct, respectively. The total cost ratio remained stable.

By increasing the scale and quality of management, the company's property management business achieved revenue of 14.758 billion yuan, an increase of 18.03% over the previous year, accounting for 94.44% of the company's revenue. Among them, basic property management achieved revenue of 12.113 billion yuan, accounting for 82.08% of property management revenue, and gross margin of 8.76%, a slight decrease of 1.02 pct from 2022.

By the end of 2023, the company's managed area was 345 million square meters, an increase of 10.74% over the previous year, of which 34.64% came from the controlling shareholder, China Merchants Shekou. The company continues to deepen collaboration with controlling shareholders to develop value-added businesses to achieve optimal collaboration. Looking at the distribution of business formats, the residential sector and the non-residential sector accounted for 38.10% and 61.90% of the total managed area, respectively, while the share of the non-residential sector increased by 3.14 pcts compared to 2022. Non-residential businesses occupy all major tracks, including offices, public, parks, government, schools, businesses, urban spaces, and others. Looking at the unit price of property management, the average unit price of the company's basic property management was 2.93 yuan/square meter/month, up 8.76% from 2022. Among them, residential and non-residential unit prices were 2.16 yuan/square meter/month and 3.40 yuan/square meter/month respectively, up 5.40% and 8.17%, respectively. The unit price of the non-residential sector and the share of managed area have increased, helping to increase the unit price of basic property management services.

Value-added services are progressing steadily: Platform value-added services in the property management business achieved revenue of 584 million yuan, and professional value-added services achieved revenue of 2,061 billion yuan, accounting for 3.96% and 13.96% of property management revenue respectively.

Gross margins were 8.49% and 17.81%, respectively, up 2.46pct and 1.51pct from 2022, respectively. 1) The platform's value-added services continue to expand. For example, the enterprise mall abandons the low-gross margin business, creates an easy procurement service brand, undertakes the operation of the China Merchants Group catalog procurement platform, and also provides procurement services for non-resident project customers for office products, industrial products, etc. 2) Various sectors of professional value-added services started up and went hand in hand: Investment promotion facilities gradually became the core IFM service provider for customers such as Huawei. China Merchants Building further broadened the acceptance path for several installations, etc., and won bids for projects in Harbin, Hunan, etc., and Nanguang elevator sales and installation business increased 135% year over year.

Improved operation and management capabilities: The company's asset management business achieved revenue of 698 million yuan in 2023, a year-on-year increase of 50.13%, and a gross profit margin of 50.74%, an increase of 9.17 pcts over 2022. 1) Commercial operations achieved revenue of 245 million yuan, an increase of 138.68% over the previous year. By the end of 2023, China Merchants was managing 70 commercial projects (including preparatory projects), with a management area of 3.97 million square meters, of which 3 were self-owned, 58 were managed by China Merchants Shekou projects, and 9 were exported by third parties. 2) The property rental management business achieved revenue of 454 million yuan, an increase of 25.09% over the previous year. By the end of 2023, the company's leasable area was 469,200 square meters, including bases, shopping centers, sporadic commerce, office buildings, residences, public buildings, etc., of which shopping centers and hotels had a leasable area of 317,700 square meters and 103,200 square meters respectively. The overall occupancy rate at the end of 2023 was 96%. Among them, the average occupancy rate for hotels, sporadic businesses, and public buildings was 100%, while the occupancy rates for shopping malls and office buildings were 94% and 91%, respectively. The high occupancy rate shows the company's strong operation and management capabilities.

Focus on shareholder returns: The company issued a shareholder return plan announcement for the next three years. In 2024-2026, when the profit level and cash flow can meet continuous operation and long-term development, in principle, the company's annual cash dividend ratio should not be less than 25%. If cash and stock dividends are used to distribute profits, the proportion of cash dividends in profit distribution is confirmed according to the stage of the company's development. The minimum situation is 20%.

Investment advice: The company's revenue and performance grew steadily in 2023. The management scale of the property management service business increased significantly, and the residential and non-residential business formats complement each other; the asset management business progressed rapidly, commercial operations developed rapidly, and the holding property rental management business showed strong operating capabilities, and the occupancy rate remained high. The 2024-2026 shareholder return plan announced by the company reflects the importance the company attaches to shareholders. Considering industry trends such as increased competition in the industry, we predict that the company's net profit for 2024-2026 will be 903 million yuan, 1,083 million yuan, and 1,270 million yuan, EPS will be 0.85 yuan/share, 1.02 yuan/share, and 1.20 yuan/share, corresponding PE will be 13.06X, 10.89X, and 9.29X, maintaining the “recommended” rating.

Risk warning: the risk that the macroeconomy falls short of expectations, the risk that the expansion of basic property management services falls short of expectations, the risk that related parties' related businesses fall short of expectations, and the risk of asset management business operations falling short of expectations.