Futu Securities released a research report stating that in 2024H1, the gross margin of some property companies has shown a stabilizing or even rising trend. The total amount of medium-term receivables and the turnover days have slightly increased, but not to a serious deterioration level; in addition, the trend of property companies to increase shareholder returns through active dividends is continuing. At the current point in time, property companies with investment value should meet the following conditions: a stable and rising comprehensive gross margin, especially the gross margin of basic property service business, for 2 or more consecutive accounting periods. Proper control of receivables turnover days, with slow growth and low percentage of receivables over one year, and the related parties still maintaining stable payment ability and willingness. The ability to sustain high dividends; and a positive willingness to distribute dividends.

The main viewpoints of Soochow Securities are as follows:

What kind of companies are able to achieve a stabilizing and rising profit margin?

Industry shows positive changes: the gross margin of some outstanding companies has shown a stabilizing or even rising trend. Taking 14 sample companies as an example, 6 companies in 2024H1 had a higher comprehensive gross margin compared to the same period in 2023. More importantly, only 3 companies had a year-on-year increase in the gross margin of the basic property service business for two consecutive reporting periods: China OVS PPT, Greentown Service, and China RES MIXC. Looking at the gross margin of various businesses, the profitability levels of China OVS PPT and Greentown Service have stabilized, leading most companies in the industry.

The reasons for the early stabilization of the gross margin of some companies can be summarized as follows: achieving economies of scale through a focused global strategy for project layout, improving per capita management efficiency, and reducing costs; executing the "quality-based expansion" strategy, with expanded projects making a positive contribution to the profit margin; real estate-related parties still maintaining normal sales and delivery, able to provide the stable volume of high-margin projects for delivery; firm exit from projects with poor or even loss-making profitability. Lastly, attention needs to be paid to changes in operating expense ratios. Only when the gross margin stabilizes and slowly decreases the operating expense ratio can it be considered that the company has achieved quality and efficiency improvement.

Will receivables pose a significant risk to the property industry?

The total amount of accounts receivable and turnover days of the sample company in mid-2024 have both slightly increased, but have not reached a severe deterioration. Regarding the analysis of accounts receivable, the summary is as follows: There is no need to worry too much about the increase in the amount of accounts receivable in mid-2024. Focus on the situation of accounts receivable of more than one year. Companies with slow growth and low proportion of accounts receivable of more than one year will have lower operational risks. According to the classification of accounts receivable recipients: turnover days are more important, reflecting the actual payment willingness and ability of customers. Currently, except for the willingness and ability of payment by state-owned enterprise-related parties, the payment ability and willingness of other parties (related parties of distressed real estate companies, C-end small homeowners, B-end, G-end) have declined. According to the classification of enterprise nature: State-owned enterprise companies have much better control over accounts receivable turnover days and accounts receivable of more than one year than non-state-owned enterprise companies.

What is the upper limit and speed of dividend payout that is acceptable to property management companies?

The trend of property management companies increasing shareholder returns through active dividend payouts is continuing. As many as 7 out of the 14 sample companies have announced mid-term dividends, and 3 companies, China Resources Mixc Life, Kuxun Cloud, and Yongsheng Services, have also announced special dividends. In addition to dividend payouts, some companies also increase shareholder equity through share repurchases. In addition to the willingness to pay dividends, the ability to sustain dividend payouts is equally important. The ability to sustain dividend payouts comes from the ability to generate cash flow, which can be measured by the net cash ratio (operating cash flow net amount / core attributable net profit) indicator. The net cash ratio should be maintained at more than 1 times in most years. Currently, Greentown Services, Binjiang Services, and state-owned enterprise companies meet the requirements.

Finally, the increase in dividend payout ratio is a function of the medium and long-term performance growth rate. Value investors are most concerned about "dividends per share", where dividends per share = total dividends / common shares = attributable net profit * dividend payout ratio / common shares. Due to the slowing down of future net profit growth, in order to maintain stable growth in "dividends per share", it is necessary to offset it with an increase in the dividend payout ratio. If it cannot be completely offset, share repurchases can be used to reduce the number of common shares. More importantly, the company needs to convince the market of its determination to maintain stable growth in "dividends per share".

Investment advice

Property management companies that are currently considered to have investment value should meet the following criteria: The comprehensive gross profit margin, especially the gross profit margin of the basic property service business, has shown a stable and upward trend for more than 2 accounting periods. Accounts receivable turnover days are properly controlled, with slow growth and low proportion of accounts receivable of more than one year, and related parties still maintain stable payment ability and willingness. They have the ability to sustain high dividends and have a positive willingness to pay dividends. According to the above requirements, state-owned enterprise property companies are relatively more suitable, but there are also a few excellent non-state-owned enterprise companies that have considerable investment value.

Recommended symbols: Poly Property (06049), China Resources Mixc Life (01209), Greentown Services (02869), and Yuexiu Services (06626). It is recommended to pay attention to China OVS PPT (02669) and Binjiang Services (03316).

Risk alert: The scale of projects delivered by major shareholders/related parties is lower than expected; real estate sales recovery is slower than expected; slow recovery of overall social demand; overseas expansion scale is lower than expected; risk of major shareholders/related parties' use of funds.