At the beginning of 2024, leading property service companies raised their dividend payment rates one after another, which was a landmark event for the sector's true de-real estate. Along with high dividends, the concept of the scale of the service industry, stable profitability, and continuous net inflow of operating cash flow is deeply rooted in the hearts of the people.
The Zhitong Finance App learned that CITIC Securities released a research report saying that in history, the property service sector has often risen and fallen with the valuations of the development sector. Investors lack confidence in the business and financial independence of the property service industry, and have not fully enjoyed the dividend returns that the cash cow industry should enjoy. Historically, although the real estate and property services industries were nominally split, balance sheet management (financing, dividends, etc.) is substantially related. Leading property service companies raised their dividend payment rates one after another in early 2024, a landmark event for the sector's true de-real estate. Along with high dividends, the concept of the scale of the service industry, stable profitability, and continuous net inflow of operating cash flow is deeply rooted in the hearts of the people. Of course, there is room for further improvement in dividends in the property services sector.
The main views of CITIC Securities are as follows:
The market highly recognizes the value of property service companies that enhance dividend payments
Major property service companies are trending up their dividend payout ratio. According to the closing price of March 27, 2023, the top 7 property service companies (China Resources Vientiane Life (01209), Wanwuyun (02602), CNOOC Property (02669), Country Garden Services (06098), Poly Property (06049), Investment Savings (001914.SZ), and Greentown Services (02869)) reached an average dividend rate of 4.2%, reaching a maximum of 6.2%. The total dividends of these companies for the full year of 2023 were 5.47 billion yuan, up 50% year on year, faster than the 3% growth rate of net profit. The four major companies (China Resources Vientiane Life, Wanwuyun, Poly Property, and Greentown Services) increased their market capitalization by an average of 6.2% and a performance index of 7.4% in the 3 trading days after the announcement of the dividend policy (less than 3 can be calculated according to the longest calculation). The three companies (Country Garden Services, Investment Savings, and CNOOC Properties) with relatively conservative dividend payouts fell by an average of 12.6% and a failure index of 12.2% in the 3 trading days after the dividend policy was announced.
For both positive and negative reasons, investors highly agree that property service companies increase dividends
On the positive side, property services are a cash cow business. The net operating cash flow inflow of the six leading companies (not announced by CNOOC Property) in 2023 was 1.37 times the net profit, and most interest-bearing liabilities were almost zero. Even in the face of economic cycle challenges, the net operating cash flow of leading property service companies has not deteriorated, and the sector has a foundation for sustainable dividends.
From the opposite perspective, the M&A market is sluggish, and investment in process transformation is often stigmatized as “bringing capital into the market”. Companies are troubled by not being able to invest capital. By the end of 2023, the total monetary capital of the seven major companies was 69 billion yuan, an increase of 18% over the previous year. Some companies have historically lent funds to related real estate companies, resulting in some bad debt depreciation, which has made investors even more worried. High dividends can relieve the pressure of accumulation of monetary capital at this stage and reduce the uncertainty of property service companies' balance sheets.
The main investment line with high dividends is expected to continue for a long time
CITIC Securities believes that the main line of investment with high dividends can continue for a long time. In terms of objective conditions, the profitability of the property services industry is highly stable. The average gross profit margin for basic services of the seven major companies was 14.1% in 2023, down only 0.1 pct from 2022. If related insurers are excluded, the average gross margin increased from 12.4% to 12.8%. The gross margin of basic services of companies such as Wanwuyun, Poly Property, Greentown Services, and CNOOC Property increased slightly. Improving the efficiency of the technology enabling process and withdrawing from loss markets determine the stability of the dynamic profitability of the enterprise. The industry's contract renewal rate is high. The basic service revenue of the seven major companies increased by 15% in 2023, and the company with the lowest basic service growth rate among leading companies can also achieve an 8% increase in related revenue. Moreover, the vast majority of leading companies attach great importance to market value management, and there is still room for improvement in dividend payment rates.
Risk warning:
The risk that dividend payment rates of some companies will be low for a long time; the risk that the development industry will decline, leading to continued shrinkage of value-added service revenue for non-owners; the risk that property service companies' inventory expansion is becoming more and more important, which may lead to diversification and damage to the competitiveness of some enterprises lacking brand reputation and technological capabilities; some property service companies may not have fully accounted for the risk of impairment of transactions related to statements.