Greentown Service's (GS) 1H24 revenue grew 10.6% YoY to RMB9.1bn, in line with our estimation. Basic property management revenue grew by 14.6% YoY, while consulting and community VAS revenues grew by 5.3% and 6.1% YoY, respectively. Gross margin improved by 0.7ppt to 19.2%, more than we had expected. Gross margin for all segments improved except for community VAS, which narrowed by 0.4ppt due to impact on property brokerage business. SG&A expense as % of revenue decreased by 0.6ppt, also improving by more than we had expected. As a result, net profit grew by 21.5% YoY to RMB505m, higher than the <15% growth we estimated in our preview. We lifted our 2024-26E core EPS by 11.0-11.6%, respectively, given better-than- expected margin, and raised our TP by 11.1% to HK$4.36. Management targets to achieve 20% core operating profit growth for FY24, while we remain conservative and estimate 16.9% core net profit growth for FY24E, leaving safety margin for possible account receivable impairments. We like GS' superior market expansion capability and efficiency improvement, maintain BUY rating on the stock.
Key Factors for Rating
Basic property management segment delivered steady growth, with new annual contract value amounted to RMB1.57bn, up from 1H23's RMB1.52bn, among which non-residential projects accounted for 52%, up from 1H23's 46%. Such industry leading market expansion is underpinned by GS' close cooperation with local SOEs in various key cities. For FY24, management targets to achieve RMB4bn new annualised contract value. GFA under management grew from 1H23's 415m sqm, end-2023's 449m sqm to end-1H24's 482m sqm, among which 383m sqm is residential.
Operating cash outflow amounted to RMB360m in 1H24, up from RMB143m in 1H23. This is partially due to exceptionally strong advance payments in 2H23, as shown by the 2x OCF/net profit ratio for FY23. Cash collection for same period revenue actually improved by 1ppt. Trade receivables increased by 17.8% YoY to RMB5.97bn, while impairment loss on trade receivables increased by 4.2% YoY to RMB120m. With seasonal increase of cash collection in 2H, management is confident to achieve 1x OCF/net profit ratio for FY24.
Key Risks for Rating
Cash collection may continue to be under pressure given economic challenge
Valuation
Our TP is set by 13x 2025E P/E. The stock currently trades at 9.6x 2025E P/E, which we think is undemanding, given GS' double-digit earnings growth, superior market expansion, and exceptional efficiency improvement.
