Maintaining a “buy” rating, the target price is HK$2.90. We believe that Financial Street Properties (the “Company”) has proven that its joint venture model is successful, which will steadily bring in additional projects under management.
We lowered our 2024-2025 earnings per share forecast to RMB 0.385 (-16.8%) and RMB 0.432 (-23.7%), and gave 2026 earnings per share of RMB 0.485, with a compound annual growth rate of 12.3% for 2023-2026. We used a price-earnings ratio of 7.0 times for 2024, lowered the target price to HK$2.90, and maintained the company's “buy” investment rating.
Strong results in 2023. The company's total management area grew steadily in 2023, reaching 40.56 million square meters at the end of 2023, an increase of 16.0% over the previous year. Total revenue for 2023 was RMB 1,514 million, up 9.1% year over year. Due to a 16.8% decline in gross margin (down 1.1 percentage points year on year), the company recorded a moderate increase of 5.8% year on year to RMB 128 million in 2023.
Stable dividend policy and attractive dividend rates. The management declared a year-end dividend of RMB 0.173 per share for the fiscal year 2023. The company maintains a steady dividend policy with a generous dividend payout ratio of over 50% (50.44% in 2023). Based on our forecast for FY2024 earnings per share of RMB0.385 and a potential dividend payout ratio of 50%, the company's dividend ratio for FY2024 is expected to reach 9.4% (current price is HK$2.29). We believe a high payout ratio will make the company more attractive to investors.
A proven joint venture cooperation model. We believe that through joint ventures, the company's ability to obtain business management projects has been continuously improved. In 2023, the company established 5 joint ventures, bringing the total number of joint ventures to 26. Given the company's state-owned enterprise background and strong reputation in CBD business management, we think the company's expansion over the next few years may exceed market expectations.
Catalysts: 1) Obtaining more high-quality office projects in the short term; 2) Improving profitability; 3) Food services turning losses into profits. Downside risks: 1) The growth rate of managed space is lower than expected; 2) demand for office buildings weakens; 3) labor costs have risen above expectations.