We have reaffirmed our “Buy” rating and adjusted our target price to HK$4.10. We expect that the rapid development of the company's value-added services business and mergers and acquisitions will bring more room for growth. We expect the company's earnings per share in 2024-2026 to be RMB 0.373, RMB 0.439 and RMB 0.517, respectively, corresponding to a compound annual growth rate of 17.3% in 2023-2026. The target price was adjusted to HK$4.10 by applying 10.0 times the 2024 price-earnings ratio. We reaffirm the company's “buy” rating.
Strong 2023 results in a challenging environment. Although most peer companies have yet to disclose their 2023 year-end results, in last year's challenging market environment, we believe that Yuexiu's excellent service should lead the industry in 2023. The company's shareholders' net profit grew steadily in 2023, up 17.0% year over year to reach RMB 487 million. The company declared a generous final dividend of RMB 0.079 per share for the year 2023, with a payout ratio of 50% for the full year, in line with market expectations. Management anticipates that the dividend payout rate will likely stabilize at 50% over the next few years.
The value-added services business will be another engine for the company's future growth. We believe that the market has fully anticipated an increase in the size of the company's management area. In terms of the management area growth prospects in 2024, the company will obtain about 4 million to 5 million square meters of additional contract area from properties developed by Yuexiu Real Estate (00123 HK), and about 12 million square meters of contract area from third-party market expansion. But on the other hand, we believe that the growth of the company's value-added services is expected to continue to exceed market expectations. Considering 1) Yuexiu Group level business support; and 2) its high-quality customer base, we expect the company to accelerate the monetization process of its value-added business development.
Catalysts: 1) Strong management area growth brought about by third party expansion; 2) rapid development of value-added service business; 3) potential mergers and acquisitions to expand scale.
Risk warning: 1) contract sales from the parent company fell short of expectations; 2) area expansion from third parties fell short of expectations; 3) risk of impairment of accounts receivable.