The company announced its interim results. 2024H1 achieved total revenue of 21.05 billion yuan, an increase of 1.5% year on year; net profit to mother was 1.44 billion, down 38.7% year on year, and core net profit was 1.84 billion yuan, down 31.7% year on year.

Basic services played a cornerstone role, and revenue growth and gross margin declined slightly. Basic property services continue to play a cornerstone role. 24H1 revenue of 12.75 billion yuan, or +4.6% year over year, is one of the main drivers of the company's overall business revenue growth, accounting for an increase of 1.8 pct to 60.6% over the same period last year. The gross margin of 2024H1's basic property services fell by 3.1 pct to 22.9%, mainly due to 1) the need to complete execution of contracts and receive consideration before confirming revenue 2) increased cleaning and greening costs to improve quality. As of 24H1, the company's fee management area increased by about 49 million square meters to 1006 million square meters compared to the beginning of '24. The total contract management area at the end of 24H1 was 1,635 million square meters. The reserve area to be converted is sufficient, and the management scale is expected to continue to maintain steady, qualitative growth.

Value-added business revenue rose and gross margin declined. 2024H1's community value-added services achieved revenue of 2 billion yuan, +6.0% year-on-year. By business, revenue from local lifestyle services increased significantly, while revenue from businesses such as real estate brokerage services and community media services declined markedly. The increase in community value-added revenue is mainly due to the company's vigorous development of a dealer-based purchasing and sales model, but due to its high upfront investment costs, the unit price and quantity of community media business contracts with high gross margin all declined year on year, and the gross margin of this business was -9.7 pct year on year to about 39.0%. Furthermore, the value-added revenue of the three supplies to the first industry/non-landlords was +23.7%/-63.4%/-9.4%, respectively, year-on-year.

The risk of impairment of accounts receivable is still hampering performance. Actively explore new growth drivers in the future. At the end of 2024H1, the original value of the company's trade receivables was 21.96 billion yuan, up 2.4 billion yuan from the beginning of the year. Among them, the original value of accounts receivable from related parties was 2.9 billion yuan, -3% from the beginning of the year, and the original value of third parties was 19.06 billion yuan, +15% compared to the beginning of the year. 24H1 accrued depreciation of trade and other receivables totaling about $0.33 billion, which is also one of the factors that dragged down the company's net profit. In the future, the company will focus on the residential management business, develop digitalization, AIoT and property robots to empower the business, promote endogenous growth, and actively incubate strategic businesses such as retail, charging piles, and robots, hoping to bring about a new growth curve.

The increase rating was maintained, and the target price was lowered to HK$4.73. According to the company's 24-year interim results announcement, the main business revenue growth rate and gross margin forecast were lowered, and the assumption of impairment of the company's assets was adjusted. After adjustment, the company's net profit forecast for 2024-2026 was 1.64/2.06/2.17 billion yuan (the original forecast was 4.4/4.86 billion yuan for 24-25). The company's 25-year EPS forecast is $0.62, and the comparable company's 2025 PE valuation is 7X, corresponding to the target price of HK$4.73. (Exchange rate: 1 HKD = 0.913 RMB).

Risk warning: Related party delivery risk. Impairment losses on accounts receivable and goodwill. The decline in gross margin exceeded expectations.