Poly Services (6049 HK)

1H24 results in line; expansion slowed amid intensifying competitionThe company' 1H24 revenue/net profit grew 10.2/10.8% YoY, in line with guidance. GPM was down 1ppt to 20.5%, and enhanced cost control reduced the SG&A ratio by 1ppt to 6.3%.The company maintained 2024E guidance of rev. and NP growth ≥ 10%. Intensified competition and reduced owner payment capabilities impacted the company's managed-GFA growth profitability, and cash collection ability. However, we remain positive given 1) it is less affected than industry peers, 2) parentco's strong mkt position securing its basic PM business. Maintain BUY but lower TP by 6% to HK$ 54.03, representing 18x 2024E P/E.

Revenue in line, margin under pressure. Rev. grew by 10.2% YoY to RMB 7.9bn, in line with the guidance. Basic PM was +16% YoY driven by a +14.9% YoY increase from Poly's projects and a +17.7% increase from third-party projects, which failed to meet the target of 20% due to heightened competition. VAS to developers declined 2.1% YoY, outperforming the industry. Community VAS decreased 1.8% YoY, affected by weak consumer sentiment. GPM narrowed by 1ppt to 20.5% and is likely to face pressure as 1) PM fee reduction policies in multiple cities may compress margins for residential projects; 2) budget cuts affecting margins of public service projects. NP was +10.8% YoY with margin expanding 0.1ppt to 10.7%, aided by a 1ppt reduction in the SG&A ratio. The company maintained 2024E guidance of rev. /NP growth ≥10%.

Third-party expansion slowed, public service conversion rate declined. Annualized contract value of new projects expanded in 1H24 fell 17% YoY to RMB 1.1bn due to heightening competition. Managed GFA from 3rd parties increased 19% YoY to 491mn sqm (vs. 28%/32% in 1H23/2023), implying a net increase of 25.9mn sqm, down 56% YoY, dragged by -42%/-62% YoY decline in residential/public services; new contract values for the two segments booked -41%/-27% YoY decline, respectively, indicating declines in the conversion from reserved-GFA, particularly for public services. The rate declined 34ppt from 56% in 1H23 to 18% in 1H24 for third-party projects, where c.85% are public projects based on historical data.

Account receivables further deteriorated by +53% to RMB 3.6bn since the end of 2023 given 1) reduced payment capabilities of residential owners; 2) budget constraints of public service project owners. The company expects improvement in 2H24 as 1) residential fee collection peaks at year-end and 2) public service arrears are addressed through government repayment plans.

Valuation: Maintain BUY rating with TP cut down 6% to HK$ 54.03, representing 18x 2024E P/E. Risks: AR impairment, intensified competition.