Both 2023 results and dividends fell short of expectations: total revenue increased 0.4% year over year to RMB 15.44 billion (same below), 3.4% lower than Bloomberg's agreed forecast, mainly due to a 47% year-on-year decline in revenue from epitaxial value-added services (affected by real estate market adjustments). Gross margin fell 4.9 percentage points to 17.1% year over year, and all four business segments recorded a decline in gross margin. Among them, owner/extended value-added services recorded the biggest decline (12.8/14.8 percentage points to 21.4/15.8% year over year). Affected by declining gross margin and increased asset impairment losses (up 107% year on year to 963 million yuan), net profit decreased by 74.9% year on year to 450 million yuan, which was lower than market expectations. After deducting one-time losses such as amortization and impairment, adjusted core net profit was 1.55 billion yuan, which was roughly in line with expectations. The company proposes to pay a final dividend of $0.06 (no dividend last year) and a dividend of $0.085 for the whole year, with a dividend ratio of about 26%.
Non-cyclical business grew steadily: With the steady expansion of the scale of property management (the area under management/contract increased 8.2%/4.8% year over year to 591 million/767 million square meters), basic property management revenue increased 7.8% year over year to 10.8 billion yuan. Owners' value-added service revenue increased 0.6% year on year to 2.33 billion yuan, and urban service revenue increased 5.5% year over year to 1.39 billion yuan.
Dependence on the real estate market and related parties has been further reduced: the revenue/net profit contribution of epitaxial value-added services closely linked to the property market cycle continued to decline to 6%/6% in 2023 (11%/12% in 2022 and 20%/29% in 2021). Looking ahead, the company expects cyclical epitaxial value-added services to account for only 5-10% of the company's revenue. In 2023, the company's third-party management area remained about 83%, which is less dependent on related party housing enterprises than peers.
The purchase was maintained, and the target price was lowered to HK$4.20. We believe that as the company's dependence on cyclical business decreases further, profit margins will soon bottom out. The company's fundamentals remain stable and dividend payments resume. Coupled with the current low valuation, it is expected that the real estate industry will grow more flexible in the future when it recovers. Although the company's performance and dividends fell slightly short of expectations, its net cash on hand reached 3.95 billion yuan (about 0.9 times its market value) at the end of 2023. We believe there is limited room for a further decline in the stock price, so we maintain the buy rating. Based on the adjusted 2023 earnings per share forecast and 4 times the 2024 price-earnings ratio, we have lowered our target price to HK$4.20.