2023 results are in line with market expectations
The company announced its 2023 results: revenue increased 0.4% year on year to 15.44 billion yuan, and net profit to mother fell 75% year on year to 450 million yuan, in line with profit warnings and market expectations, mainly due to factors such as declining gross margin of segmented business, accounts receivable and impairment of goodwill.
The management area has been growing steadily, and third-party outreach has slowed down. At the end of 2023, the company's management area increased 8% year on year to 591 million square meters, a net increase of about 44.7 million square meters from the end of 2022, and corresponding infrastructure management revenue increased 8% year over year to 10.81 billion yuan; the annual contract amount for the company's third-party outreach projects was 1.3 billion yuan, and overall expansion slowed compared to 2022 (the annual contract amount including urban service caliber was 2.5 billion yuan in 2022). We expect this is mainly due to factors such as shrinking supply in the new residential market and increased competition in the non-residential market.
Non-cyclical business gross margins continue to face some pressure. In 2023, the company's comprehensive gross margin fell 4.9 percentage points year on year to 17.1%. Among them, the profitability of core businesses such as basic property management and owner value-added all faced some pressure: 1) The gross margin of basic property management fell 2.7 percentage points year on year, mainly due to factors such as the company's increased investment in service quality and increased personnel costs; 2) the gross margin of owners' value-added services fell 12.8 percentage points, mainly due to the decline in the share of high-margin real estate cyclical business and the increase in C-side customer acquisition costs; 3) The gross margin of urban services fell 2.6 percentage points year on year The main reason is the increase in project development costs and the withdrawal of some projects with poor repayment but high gross profit.
The aging structure of trade receivables has deteriorated, and cash flow performance has improved. By the end of 2023, the company's trade receivables increased 8% year on year to 6.65 billion yuan, of which the absolute amount of related receivables decreased by 40 million yuan to 3.39 billion yuan; the share of trade receivables within the one-year period ending the end of 2023 fell 28 percentage points to 52% year on year, and the average account age had increased. The annual net operating cash inflow of the company's accounts receivable exceeded 900 million yuan (net outflow in 2022), mainly due to factors such as a certain improvement in current and past collection rates and a steady pace of payments.
Development trends
Depreciation of trade receivables is expected to continue to be under pressure. It is recommended to pay attention to changes in cash flow and dividend trends. The company aims to maintain steady growth in non-cyclical business in 2024, and maintain a core net profit margin of around 10%. We expect that as the company's project expansion focuses on cash flow and profitability, focuses on sustainable value-added services, and prudently expands urban services, the non-cyclical business may still be relatively stable. Considering changes in the age of trade receivables, we recommend that investors continue to pay attention to the company's marginal changes at the repayment level, the impairment accrual of trade receivables, and changes in corresponding cash flow trends and dividend policies.
Profit forecasting and valuation
Based on prudent assumptions about the company's profitability and receivables, we lowered our 2024 and 2025 net profit forecasts by 35% and 34% to $1.02 billion and $1.03 billion, respectively, up 121% and 2% year over year. Maintaining a neutral rating, the target price was lowered by 11% to HK$3.2, corresponding to 4 times the 2024 target price-earnings ratio, implying 4% upward space. The company is currently trading at 3.8 times its 2024 price-earnings ratio.
risks
The progress of accounts receivable repayment falls short of the expected risk, and the expansion of third-party projects falls short of the anticipated risk.