Investment advice
We upgraded the rating of Sunac Services (1516.HK) from neutral to outperforming the industry.
The reasons are as follows:
Risk factors associated with developers are gradually being clarified. At the end of 2023, the original value of trade receivables from related parties was 3.42 billion yuan, which is basically the same as the previous year; the company has accumulated impairment of 1.98 billion yuan on related party receivables, and the portion without depreciation was 640 million yuan covered by collateral, so we believe that the total exposure for further impairment is relatively manageable. On the business side, revenue from related parties fell 56% year on year to 570 million yuan in 2023, accounting for a year-on-year decline of 9.9ppt to 8.1% of revenue. We believe that the company may have basically removed the heavy “burden” of real estate-related businesses in the past and can go to battle lightly.
Core business performance is gradually returning to the right track. In 2023, the company's revenue, excluding related parties, recorded a steady increase of 10% year-on-year. During the year, the company focused on operating quality and carried out a series of management actions, such as withdrawing some property management contracts, sorting out value-added service product lines, and focusing on core cities, etc., all of which were the foundation for subsequent operations to get back on track. Looking ahead to 2024, we expect the company's property management business and community value-added service revenue to continue to record double-digit growth. The supporting factors include continuous delivery of related party projects (about 40 million square meters delivered in 2023; we expect delivery of nearly 30 million square meters in 2024) and community value-added services achieving a certain growth in a low base.
Operating cash flow is steady, cash on hand is abundant, and it is expected to continue to give back to shareholders. The company's net operating cash inflow in 2023 was 862 million yuan, 1.1 times the core net profit. Compared with the same period in 2022 (outflow of 395 million yuan), we believe or benefit from the continued pressure drop in the company's related party business and active promotion of property fee prepayment and collection actions (the company's cash flow collection rate in 2023 increased by 4ppt to 96% year-on-year). Considering the gradual stabilization of the company's core business operations and the fact that cash repayment management was indicated as a key assessment indicator at the company's performance meeting, and its abundant cash balance (about 4.44 billion yuan as of the end of 2023), we believe that the company has the foundation to maintain a high dividend ratio; in fact, the company paid 55% of core net profit for two consecutive years in 2022 to 2023, and the company announced a special dividend totaling 672 million yuan in September 2023.
What is our biggest difference from the market? We believe that the uncertainty further revealed by the company's related parties may be relatively manageable, and the return on investment implied by current stock prices and dividend payout rates is quite attractive.
Potential catalysts: The company's operating cash flow remains steady, and the dividend payout ratio remains flat or rising.
Profit forecasting and valuation
We raised our 2024 profit forecast by 9.9% to 793 million yuan (year-on-year loss) to reflect improvements in business operations other than the company's related parties; we introduced a 2025 forecast of 832 million yuan (+4.9% year over year). The rating was raised from neutral to outperforming the industry, and the target price was raised by 30.5% to HK$2.48, implying 8.5 times the 2024 price-earnings ratio and 32.6% upward space. The company traded 6.4 times the 2024 price-earnings ratio.
risks
Core business operating performance fell short of expectations; subsequent dividend payout ratios fell short of expectations.