A-Living's 2023 revenue edged up by 0.4% YoY to RMB15.4bn, 0.7% and 3.4% below BOCI and market estimates. All segments grew by single digit, except for extended VAS (to developers) which declined by 46.6% YoY, as related parties face challenges. Gross margin narrowed by 4.9ppts to 17.1%, 2.5ppts and 3.2ppts below BOCI and market estimates, partially due to more expenses related to improving service quality and equipment repairs, and partially due to revenue mix change. SG&A as % of revenue was maintained at 6.1%. A-Living recorded RMB535m impairment on account receivables, 14.9% more than previous year, and RMB428m impairment on goodwill for the first time. As a result, net profit declined by 74.9% YoY to RMB461m. We calculated that excluding one-off items, core net profit attributable to shareholders amounted to RMB1.3bn, down 38.4% YoY, 15.2% and 14.4% below BOCI and market estimates. Operating cash flow amounted to over RMB0.9bn. The company resumed dividend in 2023, and payout ratio on reported net profit was 26.2%. We cut our 2024-25E core EPS by 26.6-31.0%, respectively, factoring in lower margin and drop in extended VAS revenue. We also cut our TP by 53.5% to HK$3.36. On the one hand, OCF improved significantly in 2023, on the other hand, uncertainty remains high regarding profitability and cash collection from related parties. Downgrade to HOLD rating.
Key Factors for Rating
A-Living maintained industry leading market expansion capabilities, with new contracted GFA in 2023 reaching 60m sqm, similar to 2022. However the company also terminated projects with suboptimal profitability or cash flow, therefore total contracted GFA increased by 35.1m sqm to 766.6m sqm. Newly obtained contract value amounted to RMB1.3bn, down 48% YoY. GFA under management increased by 44.7m sqm to 590.5m sqm. Residential, public and commercial projects account for 42.4%, 46.0% and 11.6% of GFA under management, respectively.
Community VAS revenue only edged up by 0.6% YoY, with segment gross margin narrowing by 12.8ppts. Part of the reason was a decline of property market related businesses such as home decoration and carpark sales which also had higher margin. A-Living is refocusing on more sustainable businesses with more synergy with property management including group catering, energy-saving and living services.
Key Risks for Rating
Upside: dividend payout ratio has upside if positive cash flow persists
Downside: competition in the public segment may be intensified