Country Garden Services' (CGS) 1H24 revenue edged up by 1.5% YoY to RMB21bn, mainly driven by core recurring segments including property management, community VAS and three supplies and property management segments. Revenue of other segments declined, especially non-community VAS which dropped by 63.4% YoY and contributed only 1.7% of total revenue, meaning further optimisation of revenue mix. Gross margin narrowed by 3.7ppts to 21.2%, improving from 2H23's 16.3%. Gross margin for property management, community VAS and non-community VAS narrowed by 3.1ppts, 9.7ppts and 19.7ppts, respectively. Due to some one-off losses, net margin narrowed by 4.5ppts and net profit declined by 38.7% YoY to RMB1.44bn, improving from the RMB2bn loss for 2H23. Operating cash flow declined from RMB2.2bn in 1H23 to RMB270m in 1H24, while management maintains 1x cash flow coverage ratio target for FY24. We cut our 2024-26E core EPS by 9.6-11.4%, respectively, given more conservative revenue and gross margin estimations, and cut our TP by 11.4%. We think 4.3x 2026E P/E is undemanding given further optimised revenue mix and positive operating cash flow. Maintain BUY rating.
Key Factors for Rating
CGS delivered decent market expansion in 1H24, with GFA under management increasing by 49m sqm, compared to the 71m sqm we estimated for FY24. Residential projects accounted for 48.7% of new projects, increasing from 1H23's 35.6%, demonstrating CGS' refocus on this core segment.
CGS has made some encouraging developments in incubating profitable community VAS business models. One example is in the near-field retail business, where CGS was able to partner up with some business running members of their managed community to act as distributors, through which they increased number of popular products by 96.3% and increased gross margin of the sub-segment by 4ppts. Another area is charging business for electric scooters, where CGS leveraged its advantage as a property management company and started to self-operate the business, increasing revenue of the sub segment by 85.5%.
Key Risks for Rating
Economic challenge may continue to put pressure on cash collection ratio
Valuation
Our TP is derived with 6x 2025E P/E. The stock currently trades at 4.3x 2025E P/E, which we think is undemanding, given CGS' relatively stronger performance in business development, further optimised revenue mix and positive operating cash flow.
