On March 27, 2024, Country Garden Services announced its 2023 results; in 2023, the company achieved main business revenue of 42,612 billion yuan, +3.0% year on year, net profit to mother of 292 million yuan, -85.0% year on year; core net profit to mother of 3.94 billion yuan, -21.6% year on year; plans to pay a final dividend of RMB 22.81 per share.

Revenue continued to grow, gross margin declined, and net profit dropped sharply due to asset depreciation. The company's operating income in 2023 fell +3.0% year over year to 42,612 billion yuan. Mainly due to the core business, which accounts for 58.0% of total revenue, property management service revenue +8.1% to 24.699 billion yuan, community value-added service revenue -6.6% YoY to 3.753 billion, non-landlord value-added services -41.7% YoY to 1,553 billion, and property management revenue in the three supply and one businesses +21 year over year.

2% to 4.992 billion, heating service revenue +6.5% YoY to 1,528 billion, urban service revenue +1.0% YoY to 4.884 billion, and commercial operation service revenue -21.2% YoY to 1.012 billion. Changes in the company's segmented business revenue can reflect environmental trends in the industry and changes in the company's development focus to a certain extent.

During the reporting period, the company's comprehensive gross margin fell 4.3 percentage points to 20.5%, mainly due to the decline in gross margin of various businesses. This is not only related to companies taking the initiative to increase quality service costs and adjust revenue recognition methods, but also the reason for the decline in profit margins for new projects due to intense competition in the industry. During the period, the company's core profit of 3,940 million yuan was -21.6% year-on-year, but net profit was only 293 million -85.0% year-on-year, mainly due to drastic changes in the industry during 2023, the company's sharp impairment of accounts receivable from related parties and impairment of goodwill and intangible assets against previous mergers and acquisitions. During the period, financial assets depreciated by 2,594 billion yuan, and goodwill and intangible assets depreciated by 1,476 billion yuan.

The contract area exceeded 1.6 billion square meters, and the external development strength is strong

By the end of 2023, the company had a contract management area of 1,633 million square meters and a billing area of 957 million square meters. The company managed 7,345 properties, and projects spread across 31 provinces, municipalities directly under the Central Government, autonomous regions, Hong Kong Special Administrative Region and overseas. In terms of expansion, the company added 1,556 brand development projects during the period, adding annual saturated revenue of RMB 3.726 billion. Of these, 45% of the projects were located in Tier 1 and 2 cities.

Value-added business contraction and structural adjustment coexist

During the reporting period, the company's community value-added service revenue was -6.6% YoY to 3.753 billion, and non-owners' value-added services were -41.7% YoY to 1.553 billion. Although the two major value-added service segments correspond to different customer groups, they are also all affected by changes in the real estate industry's supply and demand pattern in 2023. Revenue declined due to factors such as declining delivery of new homes, shrinking demand in related service industries, and falling customer unit prices. However, from another dimension, the extent to which the company will be affected by the real estate industry in the future will also be further reduced.

Investment advice: The company's revenue continued to grow in 2023. The main business experienced a sharp decline in performance due to sharp depreciation of related parties' receivables and intangible assets. It was not a major change in the main business. After continuously accruing depreciation, the company's share of real estate-related businesses also continued to decline, and is gradually emerging from the most difficult period. Considering that the current supply and demand pattern in the real estate industry is still in the adjustment period, competition in the property industry has not abated. We adjusted the company's 2024-2025 EPS forecast to 0.58, 0.67 yuan/share (previous value 1.46, 1.61 yuan/share), and introduced the 2026 EPS forecast of 0.73 yuan/share to maintain the “buy” rating.

Risk warning: The downturn in the real estate industry exceeds expectations, mergers and acquisitions are expected to further asset depreciation, and the future property fee collection rate is lower than expected.