Greentown Service's (GS) 2023 revenue grew 17.1% YoY to RMB17.4bn, in line with our estimation. In particular, community living services revenue grew faster at 25% YoY, thanks to a new equity cooperation, excluding which the segment's revenue grew 15.6% YoY. Gross margin expanded 0.6ppt to 16.8%, 0.3ppt higher than our estimation, as gross margin of all segments expanded except for technology service. SG&A as % of revenue also decreased by 0.3ppt, 0.7ppt below our estimation. As a result, we calculated that core net profit grew by 32% YoY to RMB721m. Due to provision of a business investment in a retail company in Beijing, reported net profit only grew by 10.6% YoY to RMB605bn, 7.0% and 13.8% below BOCI and market estimations. Trade and other receivables grew by 6% YoY, slower than that of revenue. Operating cash flow reached RMB1.44bn, more than net profit. Dividend payout ratio increased from the average of 51% during 2016-22 to 73% in 2023. We cut our 2024-25E core EPS by 3.2- 8.6%, respectively, based on more prudent assumption of residential GFA expansion and VAS revenue growth. GS has delivered quality growth with decent third party expansion and improving margin and cash flow. Maintain BUY rating for the stock.
Key Factors for Rating
New contracted value in 2023 amounted to RMB4.32bn, lower than the RMB4.58bn in 2022, but higher than 2022's number at RMB4.09bn excluding a cooperative business with Cinda. Non-residential projects accounted for 46.9% among new contracted value, up from 43.5% in 2022. Average management fee for residential projects increased from 2022's RMB3.2/sqm/month to 2023's RMB3.24/sqm/month. Cash collection rate for residential projects increased from 2022's 93.3% to 2023's 95.2%. For 2024, management target to obtain at least RMB4bn new contracted value.
Community living services revenue increased by 25.0% YoY to RMB3.57bn, partially thanks to an equity cooperation. Excluding such impact, the segment's revenue grew by 16.8%. GS is refocusing on more profitable business models within the boundary of its managed communities, and closing up loss making business units. The company targets to improve gross margin of its professional product lines by 1ppt in 2024.
Key Risks for Rating
Competition in third-party market expansion may intensify.
Valuation
We rolled our valuation to 2025E, and lowered our target P/E from 15x to 13x, considering lower growth under higher base. The stock currently trades at 8.6x 2025E P/E, and 8.4% 2025E yield. We think such valuation is attractive given GS's high quality growth with improving margin and cash flow.