Maintaining a “neutral” rating, the target price was lowered to HK$3.70. We believe that Elegant Life Services (“Company”) may take longer to recover, taking into account that: 1) related party risks have not been fully resolved; 2) profitability has weakened. We expect Ya Life Service's earnings per share for 2024-2026 to be RMB 0.852, RMB 0.915, and RMB 0.927, respectively. Using 4.0 times the 2024 price-earnings ratio, we lowered our target price to HK$3.70. We maintain the company's “neutral” investment rating.
Results in 2023 were weak due to squeezing profit margins and accruing large impairment losses. Revenue growth of Elegant Living Services slowed in 2023. The year-on-year growth rate was only 0.4%, reaching RMB 15.4 billion. Overall gross margin continued to decline by 4.9 percentage points to 17.1% in 2023, but it is roughly in line with gross profit margin of 17.2% in the second half of 2022.
The company accrued significant impairment provisions for accounts receivable and goodwill in 2023 (totaling RMB 963 million), which further affected the company's profit performance. The company's net profit for shareholders in 2023 was finally recorded at RMB 461 million, a year-on-year decrease of 74.9%. Excluding these unconventional losses, the company's core net profit in 2023 reached RMB 1,552 billion (a year-on-year decrease of 30.3%), and the core net profit margin was 10.0%, which is at a reasonable level for the industry. The company declared a final dividend of RMB 0.06/share.
Profit margins are likely to continue to be under pressure, given the importance management attaches to improving the quality of the management community. In addition to macroeconomic factors, we believe that another reason the company's profit margins are under pressure is increasing investment in improving the quality of services in managed communities. Furthermore, according to our observations, the pace of the company's expansion has slowed, and the contract area in 2023 recorded only a unit increase (4.8% year-on-year increase). Considering that many of the company's management projects are obtained from third parties or through mergers and acquisitions, we expect the company to take longer to complete the transformation to improve the quality of management projects.
Mitigating stakeholder risk remains a critical task. The company's total accounts receivable and advance payments in 2023 were RMB 11.130 billion, a further increase of 3.9% over the previous year. Although the company has made sufficient provision for impairment of accounts receivable in 2023, we believe that the related party risk of Elegant Life Services is still the focus of investors' attention. According to management, the company is working to recover accounts receivable, particularly from related parties. Some unsold property assets have been used to offset part of accounts receivable from related parties.
Upward factors: 1) improved profit margins; 2) more rapidly developing value-added services for owners and city services; and 3) improved parent company liquidity.
Downside risks: 1) slow growth in management area; 2) large accrual of bad debts; and 3) increase in labor costs.