Poly Property Services
Stable growth and margin, leading third-party expansion
We expect Poly Property Services (PPS) to deliver c.10% YoY growth for 1H24E revenue and net profit, supported by its leading third-party expansion among all SOE peers. We cut our 2024-26E EPS by 5.3-8.4%, mainly due to more conservative assumptions on community VAS, which is impacted by PPS' effort to refocus on key product lines as well as pressure brought by economic challenges. We also cut our TP by 14.8% to HK$54.17. Despite challenges in cash collection, we estimate PPS' 1H24E operating cash flow (OCF) to be moderately positive. We like PPS' strong support from parent company, leading third-party expansion, and unique competitiveness in non-residential segments. Maintain BUY rating.
Key Factors for Rating
PPS leads in terms of third-party expansion among SOEs, with new annualised contract value reaching RMB3bn in 2023, compared to RMB1-2bn for most other central SOEs. Our channel check shows that competition intensified during 1H24, and PPS has given up some key biddings with less attractive risk-reward profile in June. As such, we estimate its new annualised contract value in 1H24 to decline by c.10% to c.RMB1.2bn, still higher than most peers. For 1H24, we expect similar mix of project types in terms of newly obtained GFA as in 1H23, with around 85% being public and over 10% residential.
Compared to last year, PPS faced more difficulties in terms of cash collection during 1H24 amid economic challenges. Nevertheless, we expect that PPS will be among the few peers to report positive OCF for 1H24E. Management pointed out that their exposure to public projects does not lead to more difficulties in cash collection, as the segment's accounts receivable only accounts for 10-15% of total while its revenue accounts for 25-26%. We do, however, expect accounts receivable to grow faster than revenue and OCF to be smaller than net profit, given the economic challenges, and the fact that majority of cash collections for residential projects are normally done during 2H. In our view, part of the reason why PPS can still secure positive OCF during 1H is its exposure in non-residential projects.
We estimate no growth for community VAS segment as PPS continues to streamline its product lines and focus on key areas. We estimate reduced contribution from VAS to cause 0.3ppt decline in gross margin, which would be mostly off-set by improvement in SG&A, hence stable net margin.
Key Risks for Rating
Cash collection may be further impacted by economic challenges
Valuation
We narrowed our target 2025E P/E from 18x to 17x given slower growth estimates, and cut our TP by 14.8%. The stock currently trades at 8.8x 2025E P/E, which we think is undemanding, given PPS' strong support from parent company, leading third-party expansion, and unique competitiveness in non- residential segments.
