Incident: Country Garden Service's revenue in 2023 was +3% YoY, and core net profit was -22% YoY.

Country Garden Services will hold an annual general meeting of shareholders on June 6. At that time, an ordinary resolution will be submitted to authorize directors to repurchase no more than 10% of the total number of shares issued.

In 2023, Country Garden Services achieved revenue of 42.6 billion yuan, a year-on-year increase of 3.0%, gross profit of 8.7 billion yuan, a year-on-year decrease of 14.9%, a year-on-year decrease of 85.0%. Excluding the effects of impairment of goodwill and customer relationship amortization due to mergers and acquisitions, core net profit of 3.9 billion yuan, a year-on-year decrease of 21.6%. Net cash flow from operating activities was 4.6 billion yuan, an increase of 38.9% year on year, and a total dividend amount of about 980 million yuan.

Comment: Focusing on core business, the scale advantage is obvious; impairment of related receivables is sufficient, and impairment of goodwill still need to be observed.

1) Focus on core business and make in-depth management adjustments. In 2023, the company's six major businesses, property management/non-owner value-added business/three supply and one business/community value-added business/urban services/commercial operations, achieved revenue of 247/16/65/38/49/ 1 billion yuan respectively. The property management/three supply and one industry grew steadily, with a total revenue share of 73%, and the basic market remained stable; the share of value-added revenue for non-owners fell 6.6% year on year, mainly due to the decline in new housing deliveries and the reduction of the company's home improvement agency business. Media business contracts and customer unit prices have also declined. Overall, the community value-added sector accounts for 17% of gross profit, which is an important driving force for the company's future profit growth, and further recovery is needed.

2) Leading the industry in terms of management scale, rich project reserves, and great potential for growth in the three supply and one industry. The company's leading position is stable, with 960 million square meters of management area as of the end of 2023 (in addition to the three supply and one business), an increase of 87.8 million square meters over the end of 2022. The contract area is about 1.63 billion square meters, and there are still a large number of reserve projects to be converted. As a characteristic business of the company, it has developed a good reputation and high brand reputation. The management projects cover 107 cities across the country, and undertook property management services for a large number of petroleum and petrochemical enterprise offices, apartments, staff cafeterias, kindergartens, cultural venues, etc., and also provided recharging services for employees in the community Businesses such as piles, housekeeping, laundry, and community pension meet the diverse and multi-level needs of owners, and have great potential for business growth.

3) The impairment of related receivables is sufficient, and impairment of goodwill still need to be observed. In 2023, the company accrued an impairment provision of 2.2 billion yuan for trade receivables from related parties (total trade receivables from related parties is about 3 billion yuan), which is quite sufficient; in 2023, the company calculated goodwill impairment of about 1.5 billion yuan, and the net book value of goodwill was about 16.4 billion yuan. The operating performance of mergers and acquisitions companies, delivery of contract projects, etc. still need to be further tracked, and there is uncertainty about impairment of goodwill.

Profit forecast, valuation and rating: As a leader in property management, the company has brand advantages and scale advantages. The net book value of goodwill is large, and significant impairment was calculated in 2022 and 2023; the liquidity of related parties still needs to be further observed, the payables repayment situation needs to be further tracked, and business growth such as community value addition and commercial operations are slowing down. We adjusted the company's net profit forecast for 2024-2025 to 2.25 billion yuan (original forecast of 3.3/3.9 billion yuan), adding a 2026 forecast of 2.7 billion yuan, corresponding to 2024-2026 EPS 0.67/0.76/0.81 yuan respectively, PE was 8/7/7 times. The valuation of industry leaders is attractive and maintains an “gain” rating.

Risk warning: Value-added services fall short of expectations, and impairment of goodwill and receivables are uncertain.