gist

Incident: Country Garden Services sold 1.49% of Zhuhai Wanda's shares and returned 3.14 billion yuan in cash.

On September 25, Country Garden Services announced the sale of 1.49% of Zhuhai Wanda's shares (107,945,650 shares) at a consideration of approximately RMB 3.14 billion (shares were purchased in July 2021, with an initial purchase price of 2.68 billion yuan). After the sale was completed, Country Garden Services still held 0.31% of Zhuhai Wanda's shares (22,109,350 shares).

Country Garden Services achieved revenue of 21.05 billion yuan in the first half of 2024, a year-on-year increase of 1.5%, gross profit of 4.45 billion yuan, a year-on-year decrease of 13.7%, net profit to mother of 1.44 billion yuan, a year-on-year decrease of 38.7%. Excluding the effects of impairment of goodwill and amortization of customer relationships caused by mergers and acquisitions, the core net profit to mother was 1.84 billion yuan, a year-on-year decrease of 31.7%.

Comment: The project reserves are abundant, the basic property management market is stable, cash flow needs to be improved, and attention is paid to the collection of receivables.

1) Focus on core business and make in-depth management adjustments. 2024H1's property management/non-owner value-added business/community value-added business/community value-added business/urban services/commercial operations achieved revenue of 128/4/25/2/2.2/0.3 billion yuan respectively. Property management grew steadily, revenue +4.6% year-on-year, and the revenue growth rate was +23.8%, and the basic property management market remained stable; the share of value-added income for non-owners decreased to 1.7%, and the direct impact on the future real estate market was limited; the revenue from community value-added services (including home improvement intermediary services) increased 6% year on year, mainly due to local lifestyle services (including home improvement intermediary services) Revenue increased, but the gross margin of the community value-added business fell by about 10 pct to 39% year-on-year due to a decrease in the number of community media business contracts and customer unit prices with high profit margins. Overall, the community value-added sector focuses on residents' community consumption. It has great potential for growth and high gross margin, which is an important driving force for the company's future profit growth.

2) Leading the industry in management scale, with rich project reserves. As of the first half of 2024, the management area was 1.01 billion square meters (in addition to the three supply and one industry), with a contract area of about 1.63 billion square meters, and there are still a large number of reserve projects to be converted; the three supply one industry is the company's characteristic business, and has formed a good reputation and high brand reputation. The company has undertaken property management services such as office buildings, apartments, employee cafeterias, etc. of a large number of petroleum and petrochemical enterprises, expanding the scope of services and opening up room for business growth.

3) Operating cash flow needs to be improved. Pay attention to the receivables repayment situation. As of June 30, 2024, the total amount of the company's trade receivables was about $22 billion (of which $2.9 billion was deducted from related parties, and the total amount of accounts receivable from related parties and impairment provisions decreased slightly from the end of 2023). The company's operating cash flow for the first half of the year was $0.27 billion, down 87.7% from the same period last year ($2.19 billion), mainly due to a decline in net profit and an increase in accounts receivable due to a decrease in collection rates, etc. The Commission takes measures such as settlement of overdue accounts receivable, litigation/arbitration, etc., and the subsequent repayment status remains to be seen.

Profit forecasting, valuation and rating: As a leader in property management, the company has brand advantages and scale advantages. The core business is developing steadily. It is affected by the real estate industry in the short term, and there is some uncertainty about receivables and goodwill impairment. We maintain the company's net profit forecast for 2024-2026 at 2.2/2.5/2.7 billion yuan, corresponding PE of 7.4/6.5/6.0 times. The leading industry valuation is attractive and maintains an “increase in holdings” rating.

Risk warning: Value-added services fall short of expectations, and impairment of goodwill and receivables are uncertain.