1H24 Core operating profit exceeds market expectations

The company announced its results for the first half of 2024: revenue increased 11% year on year to 9.07 billion yuan, and core operating profit (gross profit minus sales management expenses) increased 26% year on year to 0.89 billion yuan, exceeding market expectations. It was mainly due to factors such as increased gross margin of basic property management, consulting services and continued decline in sales management expenses; net profit to mother increased 21% to 0.5 billion yuan year on year, in line with our expectations.

Core competitiveness is driving the property management sector to continue to advance steadily. At the end of the first half of 2024, the company's management area increased 16% year on year to 0.48 billion square meters, corresponding to an average property fee of 3.20 yuan/square meter/month, and remained at a high level; in the first half of the year, the company focused on key cities to achieve an annualized contract amount of 1.57 billion yuan (3% year-on-year increase, of which non-residential contract amount accounted for 52%), and the unit price of the property fee for Xintuo projects was 3.7 yuan/square meter/month, continuing the pace of high-quality expansion. The gross margin of the basic property management business increased 1.1 percentage points year-on-year to 14.9% in the first half of the year (a record high for half a year). The main reason was to continue to promote refined management of management projects and increase control over project collection and staffing.

The current collection rate increased slightly, and the scale of new accounts receivable was controlled. In the first half of 2024, the company's current repayment rate increased by 1 percentage point year-on-year, corresponding to the balance of trade accounts receivable of 5.97 billion yuan, up 1.31 billion yuan from the end of 2023 (1H23 trade receivables balance increased by 1.27 billion yuan at the end of 2022). The absolute amount of increase remained stable, and the increase in the scale of accounts receivable was controlled; the net operating cash flow for the first half of the year was 0.36 billion yuan, an increase of 0.22 billion yuan over the same period last year.

Development trends

Operational and financial improvements are showing initial results, and we continue to be optimistic about the company's mid-term development prospects. The company showed performance of improving the quality and efficiency of operations and steady financial improvements for two consecutive performance periods. We believe that the company's efficiency optimization and strategic focus after changes in operation and management are on the right track, and it is expected that it will continue to support the company's mid-term business performance. The conditions for unlocking the company's equity incentives correspond to a 20%/17%/14% year-on-year increase in core operating profit in 2024-26; considering the company's high-quality brand and competitiveness in the core property management business and the emphasis on shareholder returns, we are optimistic about the company's development prospects and value delivery in the medium to long term.

Profit forecasting and valuation

Considering that the company's core operating profit for the first half of the year exceeded expectations, we raised our 2024 and 2025 net profit forecasts by 4% and 7% to 0.76 billion yuan and 9.1 billion yuan, respectively, up 25% and 20% year on year (corresponding to a 20% and 17% year-on-year increase in core operating profit). Maintaining an outperforming industry rating and target price of HK$4.6, corresponding to the target price-earnings ratio of 17 times in 2024, implying 48% upside. The company is currently trading at 12 times its 2024 price-earnings ratio.

risks

Progress in improving quality and efficiency falls short of expected risks, impairment improvements in some asset classes fall short of expected risks, and competition from third parties increases risks, etc.