We estimate that Greentown Service's (GS) 1H24 revenue will grow by over 10%, supported by its strong third-party expansion backed by GS' brand name and cooperation with local SOEs. We also expect its gross margin to improve over 1H23 thanks to higher efficiency and streamlined product lines, and therefore estimate 1H24 core operating profit to grow by c.15%. However, we expect more impairment on account receivables than 1H23, and so estimate <15% net profit growth for 1H24. Considering economic challenges, we expect more operating cash outflow in 1H24 than 1H23, but foresee OCF to turn positive in 2H24 due to seasonal pickup in cash collection. We like GS' strong third-party expansion capability, and its improving efficiency. Maintain BUY rating for the stock.

Key Factors for Rating

GS continues to leverage its strong brand name and close cooperation with local SOEs to deliver strong performance in third-party expansion. We estimate annualised new contract value in 1H24 to be c.RMB1.5bn, roughly flat compared to 1H23 despite intensified competition. We estimate that non-residential projects accounted for around 50% of the new contract value in 1H24, up from 1H23's 46%.

We expect 1H24E community VAS revenue to grow slower than basic property management revenue, as GS continues to streamline its product lines, reducing less viable businesses such as repairs for small third-party 2C owners, and closing loss-making shops for the education segment. The education segment broke even last year and is expected to deliver profit this year. As a result, we expect gross margin of community VAS segment to improve in 1H24. Thanks to GS' accumulation of client resources and superior product capability, we also expect consultancy segment to deliver positive revenue growth in 1H24, despite the correction in the property market.

We expect GS' gross margin to improve for most of its business segments, thanks to the company's efforts in efficiency improvement. In the basic property management segment, GS targets to increase labour cost by only 70% of revenue growth. We estimate 2024 gross margin to improve to 16.9% from 2023's 16.8%.

Impairment of receivable amounted to RMB116m in 1H23, and we expect more for 1H24 considering more economic challenges. We also expect more operating cash outflow in 1H24 than the RMB143m for 1H23. We expect OCF to turn positive in 2H24 due to seasonal pickup in cash collection.

Key Risks for Rating

Challenging economic environment may put pressure on cash collection rate.

Valuation

Our TP is based on 13x 2025E P/E. The stock currently trades at 11.3x 2025E P/E, which we see as undemanding, given the company's strong third-party expansion capability, improving efficiency and margin, and 11% 2024-26E earnings CAGR.