2H23 results fall short of market expectations
The company announced its 2023 results: revenue increased 20% year-on-year to 13.05 billion yuan, and net profit to mother increased 23% year-on-year to 1.34 billion yuan, lower than Bloomberg's agreed forecast of 11%. The growth rate was significantly slower than 1H23. The main reason was that value-added services were significantly impacted by the environment in the second half of 2023. The company maintains the original dividend policy, with an annual dividend payout rate of 32%, corresponding to a dividend yield of 3.2%.
The basic property management business is steady, and operating efficiency has also improved. At the end of 2023, the company's management area increased 25% year on year to 402 million square meters, and Xintuo's contract area for the whole year was 109 million square meters, up 33% year on year.
The gross margin of basic property management for the 2023 package production project increased 2.1 percentage points to 12.7% year on year, mainly due to factors such as the company's increased subcontracting efforts to optimize the human structure, improved operating efficiency, and additional costs for prevention and control in 2022; the absolute amount of sales and management expenses decreased by 3% year over year, and cost control continued to achieve results.
Value-added services were impacted by the environment, putting pressure on revenue and profits in the second half of the year. In 2023, revenue from value-added services for the company's residents and non-residents increased 71% and 18% year on year, but due to changes in the market environment and business structure (the share of low-profit businesses such as community retail and procurement in value-added services for households increased, and the share of low-margin engineering businesses in value-added services for non-residents increased), the gross profit of residential and non-residential value-added services increased 16% and decreased 6% year on year, respectively (of which 2H23 gross profit decreased by 14% and 27% year on year, respectively).
Development trends
The ballast stone business for property management is expected to continue to grow steadily, and the performance of value-added services is expected to be linked to the environment. The company has core competitiveness in the field of property management. The scale of external development has maintained rapid growth over the past many years (68% compound growth rate in 2018-23). In 2023, the new development area was 109 million square meters, and the corresponding annual contract amount exceeded 2 billion yuan. The company aims to expand quantitatively in 2024 to no lower than 2023. Compared with the company's 402 million square meters of management area at the end of 2023, revenue from the property management sector of 9.41 billion yuan, and comprehensive consideration of the group's resource support (23.7 million square meters of newly delivered area from the China Sea Department in 2023), we expect the property management sector to continue to grow steadily. In 2023, businesses other than property management accounted for 28% of the company's revenue and 32% of gross profit. Among them, developments in pre-delivery services, inspection and consulting are expected to be linked to the economic real estate environment.
The process of improving internal management efficiency is expected to continue, and external shareholder return policy trends require attention. In terms of internal management, the company's guidelines will continue to work to improve quality and efficiency, focus on technological progress and optimize costs while continuing to reduce headquarters expenses, and maintain a net profit margin of no less than 10%. In terms of returns to external shareholders, with the gradual shift in growth, the average dividend ratio of major comparable companies increased by 12ppt to 52% in 2023. CNOOC Property currently guides a dividend payout ratio of no less than 30%. Investors are advised to continue to pay attention to the company's comprehensive trade-off between corporate growth and shareholder returns.
Profit forecasting and valuation
We lowered the company's net profit due by 15% and 16% to 2024 and 2025 to 1.58 billion yuan and 1.82 billion yuan (up 18% and 15% year over year), mainly taking into account the market environment challenges the company continues to face.
Maintaining an outperforming industry rating, the target price was lowered by 22% to HK$6.0 (corresponding to 11 times the 2024 price-earnings ratio, implying 33% upside), and the company is currently trading 8.3 times the 2024 price-earnings ratio.
risks
The external development progress and profit margins of third-party projects fell short of expectations, and the progress of the value-added services business fell short of expectations.