Net profit to the mother grew rapidly in '23. Maintaining the annual report issued by the “Buy” rating company on March 26, achieving revenue of 13.05 billion yuan, +20% year over year; net profit to mother of 1.34 billion yuan, +23% year over year; dividend payout ratio of 31%, unchanged year on year. Taking into account adjustments in the real estate market and expanding the competitive economic environment, we lowered our revenue. We estimated EPS of $0.49/0.57/0.67 for 24-26 (HK$0.64/0.81 before 24-25). Comparable to the company, the average 2024 PE is 11 times. Considering the company's excellent market development performance and unique advantages in Hong Kong and Macau, we believe that the company's reasonable 2024PE is 13 times, with a target price of HK$6.90 (previous value of HK$12.50, based on 25 times 2023PE), maintaining a “buy” rating.
Basic property management revenue was disrupted by one-off factors. Subcontracting and manpower optimization drove profitability improvements. The year-on-year revenue growth rate of the company slowed down compared to previous years, mainly due to the reduction in additional management revenue in the basic property management sector due to the suspension of community quarantine facilities in Hong Kong. Revenue was +16% to 9.41 billion yuan. If this impact were excluded, core basic property management revenue was +26% year-on-year. In addition, thanks to increased subcontracting efforts and optimized human resources structure, the company's gross margin of infrastructure management was +2.1pct compared to the previous year, and the overall gross margin remained stable (15.9%). The year-on-year growth rate of net profit to mother was slightly higher than revenue, mainly due to the year-on-year sales management expense ratio of -0.7 pct to 3.0%.
Market Development bucked the trend and grew rapidly, actively exploiting the advantages of the Hong Kong and Macao regions for 23 years to overcome fierce market competition, adding an additional external development contract area of +33% to 109 million square meters. Of these, 61% were non-residential projects, continuing to enrich the external development business format. The company continues to develop its unique advantages in Hong Kong and Macau, winning bids for projects such as the Hong Kong Housing Authority headquarters office building and the Macau Grand Prix Museum to manage the Hong Kong Hospital Authority headquarters building and over 60% of the hospital projects under its administration. The government management projects cover 12 decision-making bureaus and 21 policy implementation departments, and has steadily ranked first in the Hong Kong property management market share. By the end of '23, the company's operating area was +25% to 402 million square meters, with a year-on-year increase of 7/5 pct to 40%/30% of the third party/non-residential area, which is getting closer to the 14th Five-Year Plan “1:1 endogenous expansion” goal.
The rapid expansion of home living services and engineering services also led to a year-on-year decline in the gross margin of value-added services of the company's community value-added service revenue of +71% year-on-year, mainly due to increased demand for home improvement, retail, community collection group purchases, and home delivery services, while expanding commercial support services for merchants; however, due to changes in business structure and increased marketing investment, gross margin was -12.3 pct to 26.1% year over year. Revenue from value-added services for non-owners was +18% year-on-year, mainly due to +48% year-on-year revenue from engineering services provided by Haibo Engineering and Xinghai IoT, which hedged the contraction of services related to new home sales; however, gross margin was -3.3 pct to 13.1% year over year due to changes in business structure.
Risk warning: Support from related housing enterprises is weakening, market expansion scale and profitability are at risk of declining, and community value-added services fall short of expectations.