Poly Property Services' (PPS) 2023 revenue grew by 10% YoY to RMB15bn, in line with our estimation and 6% below market estimation. While property management revenue grew by 20.5% YoY, community VAS revenue declined by 8.1%, as PPS reduced sales of some lower margin goods, which were also boosted in 2022 due to COVID. Thanks to such optimisation of revenue structure, community VAS gross margin expanded by 6.4ppts to 38.4%. Combined with 0.4ppt improvement in property management gross margin, overall gross margin expanded by 0.8ppt to 19.6%, in line with our estimation. SG&A as % of revenue decreased by 0.6ppt. As a result, net profit grew by 24% YoY to RMB1.38bn, in line with estimation. Operating cash flow amounted to RMB2.4bn, equal to 1.73x net profit. Dividend payout ratio was lifted from 2022's 25% to 2023's 40%. We cut our 2024-25E core EPS by 1.5-4.6%, respectively, factoring in slower residential GFA growth and slower VAS growth. PPS has proved its ability to deliver high quality growth balancing efficiency, margin, cash flow, and product competitiveness. We maintain BUY rating on the stock.
Key Factors for Rating
New contracted value from third-party grew 61% YoY to RMB2.77bn, among which 54.3% was public projects, 31.7% was commercial and offices, and 14.0% was residential. New contracted value for public, commercial, and residential projects grew 36.7%, 109.9% and 92.6%, respectively. While continuing to solidify its leading position in public projects such as holistic city management and in state owned commercial properties, PPS also enhanced its strategic deployment in the residential segment by officially launching market expansion for existing residential projects in 4Q23, quickly obtaining new contracted value of RMB0.11bn, with average fee rate at RMB3.0/sqm/month.
In terms of community VAS, PPS is refocusing on core business models which leverage the community advantages the most and are sustainable. PPS strategically reduced the sales of certain goods with lower margin, which we believe saw surge during COVID-19 pandemic. As a result, although segment revenue declined by 8% YoY, gross profit increased by 10.4% YoY. PPS now focuses on 6 product lines including community retail, property asset management, home decoration, housekeeping, carpark sales, and space operation, with the first three being core products.
Key Risks for Rating
Deterioration of local fiscal situation may lead to worse cash collection.