Key points of investment

Event: The company released its 2023 annual report. Revenue for the full year of 2023 was 3.27 billion yuan, a year-on-year decrease of 35.6%; net profit to mother of 62.96 million yuan decreased losses compared to the same period last year. The performance was in line with expectations.

Core business revenue grew rapidly, gross margin increased sequentially in the fourth quarter, and is expected to turn losses into profits in the future.

The year-on-year decrease in the company's revenue in 2023 is mainly due to the company's asset replacement of assets and liabilities related to the housing business with 100% shares of Pearl River City Services held by Zhushi Group and Pearl River Health in the first half of 2023. Real estate companies will no longer be included in the scope of consolidated statements since April 2023. Excluding real estate-related businesses, the property service business achieved revenue of 1.06 billion yuan in 2023, an increase of 8.0% over the previous year; the cultural and sports operation business achieved revenue of 320 million yuan, a sharp increase of 36.4% over the previous year. Profit side: By business, the gross margin of property services for the full year of 2023 was 16.9%, up 3.0 pct year on year; gross margin of cultural and sports operations was 31.9%, down 4.7 pct year on year. The company's gross margin for the fourth quarter of 2023 was 27.3%, up 5.7pct from the third quarter. The company achieved net profit of 12.92 million yuan in the fourth quarter, turning a loss into a profit compared to the third quarter. By the end of 2023, the company's non-current liabilities due within one year were 1.13 billion yuan, a sharp decrease of 890 million yuan compared to 2.02 billion yuan at the end of the third quarter. We believe that the company's interest expenses are expected to be gradually reduced in 2024, compounded by the rapid growth of the main business and the steady increase in profit margins, and the performance is expected to turn a loss into a profit.

The business format for management projects is diverse, and the urban clothing sector has a significant first-mover advantage. By the end of 2023, Pearl River City had a total of 371 projects under management (148 residential buildings, 198 non-residential buildings, 25 stadiums), with a total managed area of 35.992 million square meters (of which the stadium area was 3.083 million square meters). Non-residential projects cover various business formats such as hotels, commercial buildings, public facilities, industrial parks, and government offices. In terms of urban services: The company successfully expanded 5 cultural and sports projects in 2023, and currently has 25 projects in operation. In 2023, 88 large-scale performing arts events were held, with over 650,000 participants; 318 large-scale sporting events were held throughout the year, including 4 at the international level, 37 at the national level, and 58 at the provincial level. The company has a clear first-mover advantage. It has great advantages and rich experience in participating in venue construction and management and operation services through contract operation and public-private partnership (PPP) models. It is currently the only company in China that has successfully completed the entire tournament chain. Since the average operating period of stadium projects is 15-17 years, up to 30 years, the company's business has stable cash flow and strong sustainable development capabilities.

Strengthen group collaboration and take advantage of urban and village policies, and business expansion can be expected. As a major shareholder of the company, Zhushi Group has become the largest state-owned housing rental platform and state-owned land preparation platform for urban renewal in Guangzhou. After the restructuring, Pearl River Co., Ltd. has strengthened collaboration with Zhushi Group. In this round of urban village renovation in megacities, Pearl River Co., Ltd. had the opportunity to undertake property services and cultural and sports operations for a large number of projects by parent companies and brother companies, helping to further expand the scale of management.

Profit forecast: After completing the asset restructuring, the company successfully achieved a strategic transformation from “real estate” to “urban service+sports operation”. Revenue grew rapidly and profit margins increased steadily. We maintain the company's net profit forecast for 2024/2025 at $0.82/95 million, and the estimated net profit for 2026 to be $105 million. The corresponding EPS is 0.10/0.11/0.12 yuan, and the corresponding PE is 30.7X/26.7X/24.0X, maintaining a “buy” rating.

Risk warning: The implementation of urban village renovation policies fell short of expectations; real estate market sentiment exceeded expectations; market-based expansion fell short of expectations.