Incident: The company announced its 2024 interim results. The company achieved operating income of 21.05 billion yuan in the first half of the year, an increase of 1.5% year on year; achieved core net profit attributable to shareholders of about 1.84 billion yuan, a year-on-year decrease of about 31.7%; and achieved basic earnings per share of 0.43 yuan/share, or -38.2% year on year.

Revenue is stable, and profits and operating cash flow are falling under pressure

The company achieved revenue of 21.05 billion yuan in 24H1, +1.5% year-on-year; realized core net profit of 1.84 billion yuan to mother, or -31.7% year-on-year. The company's 24H1 overall gross profit margin was 21.16%, down 3.72 pct from the same period in '23. The main reason for the decline in the company's gross margin was 1) due to the principle of prudence, the company adjusted the revenue recognition rules for credit risk customers in August 23; 2) the impact of external adverse factors, and the decline in gross margin of some businesses due to business management factors. The gross margin of 24H1 property management/ community value-added/non-owner value-added/three supply and one business/ city/commercial operation services was 22.9%/39.0%/-6.5%/9.7%/16%/31%, respectively, compared with -3.1/-9.7/-19.7/+2.5/-5.1/-7.4pct for the same period in '23, respectively.

The net cash from 24H1's operating activities was about 0.27 billion yuan, down 87.7% from the same period in '23, mainly due to 1) the decline in net profit; 2) the risk merchant business and fees from small landlords were not growing as fast as the scale, which led to a year-on-year decline in the comprehensive fee rate, which in turn led to an increase in accounts receivable, etc. 24H1 accrued impairment losses of 0.32 billion yuan in accounts receivable. As of the end of 24H1, the book value of the company's accounts receivable was 18.5 billion yuan, of which related parties and third parties were approximately 0.75 billion yuan and 17.75 billion yuan respectively. The company's 24H1 net profit margin was 7.34%, compared to -4.66pct in the same period in '23. The company's 24H1 sales management rate was reduced by 0.11pct to 9.40% compared to the same period in '23, and its ability to control expenses was improved.

The scale of management has grown steadily, and the share of Xintuo housing has increased

By the end of 24H1, in addition to the three supply and one industry business, the company's contract management area was about 1.635 billion square meters, -0.71%; the fee management area was about 1.006 billion square meters, +9.78%; and the number of management projects was 7695, an increase of 709 over the same period in '23, of which the toll management area located in Tier 1 and 2 cities accounted for about 40.7%. In terms of market expansion, the company insists on housing as the core, based on the density of urban housing projects, and focusing on strategic and key cities. 24H1's share of annual contract and entry revenue contributed by the housing industry reached about 48.7%, an increase of nearly 13 pcts over the same period; projects located in strategic and key cities contributed more than 65% of the annual revenue of new contracts and entry in the same year.

The share of property management revenue has increased, and the community's value-added performance is good

Property management services, 24H1 achieved revenue of 12.752 billion yuan, +4.6% year-on-year, accounting for 60.6% of revenue, +1.8pct compared to the same period in '23; among them, third-party projects accounted for 54.5% of revenue, a decrease of 1.7 pct compared to the same period in '23. Community value-added services, 24H1 achieved revenue of 1.998 billion yuan, +6.0% year over year, accounting for 9.5% of revenue, +0.4 pct over the same period in '23. The increase was mainly due to good retail business performance. For value-added services for non-owners, 24H1 achieved revenue of 0.356 billion yuan, or -63.4%, accounting for 1.7% of revenue. Compared with the same period in '23, the decline was mainly due to the company's active pressure to reduce the size of related party transactions. In the three supply and one industry business, 24H1 achieved revenue of 3.345 billion yuan, +23.8% year-on-year, accounting for 15.9% of revenue, and +2.9pct over the same period in '23. Urban services, 24H1 achieved revenue of 2.17 billion yuan, -9.4% year-on-year, accounting for 10.3% of revenue. Compared with the same period in '23, -1.2pct, the decline was mainly due to the company's voluntary withdrawal from several sanitation projects. Commercial operation services, 24H1 achieved revenue of 0.332 billion yuan, or -37.9% year-on-year, accounting for 1.6% of revenue. The decline was mainly due to the early termination of property leasing and commercial management contracts between the two parties between the company and Country Garden Real Estate Group.

Investment advice: The company's revenue was stable in the first half of '24, expansion was stable, and diversified business continued to grow. Considering that the company's profit declined due to the decline in value-added services for non-owners and depreciation of receivables, etc., we adjusted and predicted that the company's net profit for 24-25 was 1.121 billion yuan and 1.207 billion yuan (original value: 5.031, 5.455 billion yuan), and added a 26-year forecast of 1.261 billion yuan, which was adjusted to the “increase in holdings” rating.

Risk warning: business development falls short of expectations, uncertainty in business operation, uncertainty in policy regulation