Investment advice

We have observed that Greentown Services' internal reforms in the past two years in terms of business operation and management have initially paid off on the financial statements side. Based on its deep brand heritage and market-based development capabilities, we believe that efficiency optimization and strategic focus can gradually help the company make up for the shortcomings of profit release in the next few years. Although recent reporting levels may still fluctuate due to impairment, we urge investors to pay attention to the layout of the reform effects release process.

rationales

Positioning in the middle and high-end markets, maintaining stable core competitiveness. Greentown Services is deeply involved in the Yangtze River Delta region. Since the spin-off from Greentown Real Estate in 1998, the company has adhered to an independent market-based development strategy and has a good brand, reputation and owner satisfaction in the middle and high-end markets. The amount of the company's new development contracts remained above 4 billion yuan in 2021-2023, while maintaining annual price increases for maturing projects with a contract value of 100 million yuan or more (about 1% of the annual basic property management revenue ratio), highlighting the company's core competitiveness in the basic property management business. By the end of 2023, the company's management area reached 448 million square meters, and the average property management fee for the corresponding project was 3.24 yuan/square meter/month (the average price for most property management companies was 2.0-2.5 yuan/square meter/month).

Efficiency optimization and strategic focus began to bear fruit after the new management took office. Since 2021, the company has gradually adjusted its business strategy and adopted a strategic shift from heavy investment to light; since the new management took office, organizational structure adjustments at the front end of the project and continued to promote cost reduction and efficiency at the front end of the project, while raising the threshold for market expansion, clarifying acceptance strategies, focusing on product and profitability development for the park's core service business, and prudent investment reduced the pressure on the balance sheet. In 2023, the company's basic property management gross profit margin, sales and management expense ratio, collection rate, and operating cash flow all showed varying degrees of improvement. Considering the current level of the company's operating efficiency and financial statements, we expect that there is still some potential room for improvement in future core indicators.

Profit release has potential, and strengthened governance and a focus on shareholder returns also provide additional support. The company guides revenue growth of no less than 10% year on year in 2024, core operating profit growth of not less than 15% year on year, medium- to long-term revenue and profit growth rate maintaining double digit level, and core operating profit growth rate faster than revenue growth rate. We expect that stabilizing new expansion contracts will support revenue growth, and that the continued deepening of efficiency improvement measures will help the basic property management business guarantee the bottom line of profits. If diversified businesses and depreciation improve, there will be some flexibility. We believe that the continued improvement of corporate governance and the importance placed on shareholder returns (the 2023 repurchase amount corresponds to 22% net profit ratio and 72% dividend ratio) is expected to provide some support for the company's long-term value.

Profit forecasting and valuation

We maintained our outperforming industry rating, maintained profit forecasts, and raised our target price by 35% to HK$4.6 (corresponding to 18 times the 2024 target price-earnings ratio and 19% upside), mainly taking into account rising market risk appetite and increasing potential profit release possibilities. The company is currently trading at 15.3 times its 2024 price-earnings ratio.

risks

The company's progress in improving quality and efficiency falls short of expected risks, impairment improvements in some asset classes fall short of expectations, and third party external development competition increases risks, etc.