2023 results fall short of market expectations

Shoucheng Holdings announced its 2023 results: revenue and gross profit fell 45% and 66% year-on-year to HK$8.83 million, respectively, and net profit to mother fell 56% year-on-year to HK$404 million, corresponding to basic earnings per share of HK5.57 cents, lower than market expectations (mainly due to unrealized investment losses due to fluctuations in REITs prices. If this effect is excluded, the annual revenue is basically the same as revenue of the same caliber in '22).

The company declared a final dividend of HK$161 million (interim dividend of HK$243 million), with a dividend rate of approximately 5.6% corresponding to the current closing price for the full year.

Asset operating income increased year-on-year, and investment losses affected full-year results. 1) The company's asset operating revenue increased 13% year over year to HK$658 million. Among them, parking operation service revenue increased 43% year over year to HK$555 million due to the recovery in parking demand after the pandemic. 2) Asset financing revenue fell sharply by 78% year on year to HK$225 million, of which financial asset investment income recorded at fair value (mainly public REITs investments) turned negative year-on-year to HK$153 million, which had a significant impact on the annual results; the fund management services business was generally stable, with revenue falling 2% year on year to HK$183 million.

A healthy balance sheet. The company's financial costs increased 3.9% year over year to HK$106 million (mainly due to interest generated by the company issuing parking asset REITs products), and the capital debt ratio decreased by 0.9 ppt to 25.7% year on year, and the financial situation was good.

Development trends

Revenue from parking operations is expected to grow steadily. According to the announcement, the company won bids and signed contracts for the Guangzhou Baiyun Airport and Beijing Fengtai Station parking lot projects within 23 years, while actively investing in the construction and operation of NEV charging stations. We believe that with the continuous expansion of the company's parking space management scale, parking operation revenue is expected to grow steadily.

The asset financing business can be expected. According to the announcement, the company set up 2 investment funds with a target size of 10 billion yuan within 23 years (1 of which is mainly used to acquire assets with REITs development potential) and successfully issued the market's first parking asset REITs product. We believe that with the development of the Chinese public REITs market in the future, the company is expected to open up a closed loop of “investment and finance management regression” and help grow its performance.

Profit forecasting and valuation

Carefully considering the company's investment income and excess return on investment funds, we lowered the 2024 net profit forecast by 64% to HK$480 million, and introduced the 2025 net profit forecast of HK$53 million (up 11% year over year). In view of the company's 2023 performance being overadjusted due to unanticipated losses on unanticipated investment, we believe that future earnings are expected to definitively recover from this low base, maintain an outperforming industry rating, and lower the target price by 34% to HK$1.66, corresponding 25 times the 2024 price-earnings ratio, implying 9% upward space compared to the current stock price. The company currently trades at 23 times the 2024 price-earnings ratio and 21 times the 2025 price-earnings ratio.

risks

Parking business expansion is slow; public offering REITs prices fluctuate; dividend amounts fall short of expectations.