Shimao's service performance is basically in line with market expectations

Shimao Services announced 2023 results: Revenue fell 5.0% year on year to 8.203 billion yuan, net profit to mother reversed losses year on year and recorded 273 million yuan, and core net profit (excluding impairment provisions, fair value changes in mergers and acquisitions, amortization of intangible assets, etc.) increased 29.6% year on year to 648 million yuan. Taking into account the performance of return home and core net profit, the company's performance was basically in line with market expectations. The company did not declare a dividend in 2023.

The entire business line is still in a period of adjustment. In 2023, the company's basic property management business revenue rose 5% year on year to 5.292 billion yuan, and the management and contract area fell slightly year on year at the end of 2023; although the company's third party development performance was still good (Xintuo's third party contract annual saturated revenue of 1,422 million square meters in 2023, corresponding contract area of 41.7 million square meters, a slight year-on-year increase), the company also carried out a large number of withdrawals (we estimate that the contract area of the exit project may reach nearly 60 million square meters), putting pressure on the management scale and business revenue. In 2023, the company's community value-added service revenue fell 19% year on year to 1,363 billion yuan. Among them, smart scenario services (revenue decreased 75% year over year to 85.6 million yuan) and new retail services (revenue decreased 65% year over year to 44.6 million yuan) were particularly significant, or reflected the company's continuous sorting and adjustment of business lines.

Profit in the statement was still affected by impairment. Among them, the impairment pressure on receivables eased, and intangible asset impairment due to mergers and acquisitions continued. The total amount of the company's trade receivables in 2023 slightly increased by 116 million yuan to 4.103 billion yuan compared to 2022, of which the total amount of related party trade receivables (748 million yuan at the end of 2023) was basically the same; the impairment of 2023 receivables was estimated at 86.6 million yuan (compared with 657 million yuan in 2022), and the pressure has eased somewhat. However, due to the fact that the operation of some of the mergers and acquisitions fell short of expectations, the company reduced goodwill and intangible assets generated by the mergers and acquisitions by $121 million in 2023.

Development trends

Pay attention to the continuation of subsequent cash flow performance and dividend payment policies. The company's net operating cash flow inflow of $1,030 billion in 2023 (net outflow of $1,512 billion in 2022) may be related to the company's active collection actions and a significant decline in related parties' business volume. Looking ahead, we recommend paying attention to the company's steady cash flow level and whether the company will propose a more active dividend payment policy after matters relating to the restructuring of the company's related parties' debts progress.

Profit forecasting and valuation

We lowered the company's net profit forecast for 2024 by 43% to 307 million yuan (up 12% year on year) and introduced a net profit forecast of 321 million yuan for 2025 (up 4.5% year over year). Maintaining a neutral rating, the target price was lowered by 17% to HK$1.0, corresponding to 7 times the 2024 price-earnings ratio and 18% upward space. It mainly takes into account the company's operating cash flow and cash level in hand, or plays a certain supporting role in the valuation. The company traded 6.1 times the 2024 price-earnings ratio.

risks

Cash flow performance fell short of expectations; profit performance fell short of expectations due to the withdrawal of property management projects exceeding expectations.