Matters:

Poly Property released its 2024 mid-year report. 2024H1 revenue was 7.87 billion yuan, up 10.2% year on year; net profit to mother was 0.85 billion yuan, up 10.8% year on year.

Ping An's point of view:

The leading property management performance of central enterprises has been improving steadily, and net profit margins have remained stable. Against the backdrop of deep adjustments in the upstream real estate industry, a certain degree of contraction in service procurement budgets and fluctuations in consumer spending intentions, etc., the company's 2024H1 revenue and profit remained resilient; the 2024H1 contract area and management area were 0.95 and 0.76 billion square meters respectively, and the scale advantage continued to strengthen.

Third-party projects and non-residential businesses accounted for 64.9% and 60.5% of the management area, respectively. The business mix was optimized, and the marketization process accelerated; although the gross margins of property management services and value-added services for non-owners declined by 0.2 pct and 1.6 pc, respectively, the effects of improving the quality and efficiency of company management were beginning to show. The management fee ratio fell 1 pct year on year, community value-added services accelerated transformation and adjustment, and gross margin increased 0.7 pct year on year, driving the net profit margin level to remain stable.

The sales volume of related parties has steadily ranked first in the industry, and third parties are expanding well. Poly Development, a housing company associated with 2024H1, ranks first in the industry in terms of sales (according to the Crewe list), and the scale of Poly projects has grown steadily in terms of management and contract area. In terms of external development, the company took the initiative to strengthen project screening and density focus, launch a “super fast charging model” in the commercial and service sector, upgrade traditional IFM services, and push forward division reforms. Third-party property management service revenue increased 17.7% year-on-year in 2023, accounting for 41.1%, and added benchmark projects such as Zhouzhuang Ancient Town.

Community value-added services are refined, and non-owners' value-added services are built up with engineering expertise. In terms of community value-added services, the company actively screened service projects and deepened the “asset management service+community life service” sector, which has entered a new stage of vertical industry capacity building for core products driven by traditional traffic and resource transformation. Although the revenue side of 2024H1 community value-added services declined slightly year on year, gross profit margin and gross profit increased 0.7 pct and 0.2% year over year, respectively, and transformation and exploration are beginning to bear fruit. In response to upstream real estate adjustments, the company extended the entire real estate development process, enhanced the ability to undertake the entire chain, built engineering expertise, built two major engineering companies, “Core Intelligence” and “German Elevator”, and deepened real estate development service collaboration.

Investment advice: The company's related party, Poly, has steady financial operations. Subsequent support from related parties is still reliable and guaranteed, and the basic infrastructure of property services is still relatively stable. As the company continues to reform and optimize third-party outreach, community value-added services, and value-added services for non-owners, we expect the company to maintain its leading position in the industry. However, considering the continuous adjustment of upstream real estate, the tightening of public finance expenditure, and fluctuations in residents' ability to pay, etc., we slightly lowered the company's 2024-2026 EPS forecast to 2.84 yuan, 3.15 yuan, and 3.47 yuan (originally 2.91 yuan, 3.29 yuan, 3.68 yuan). The current stock price corresponds to PE of 8.2 times, 7.4 times, and 6.7 times, respectively, maintaining the “recommended” rating.

Risk warning: 1) Negative sentiment caused by credit incidents of individual housing enterprises may once again affect the property management sector; 2) if brand outreach capacity increases slowly, it may adversely affect the company's third-party expansion; 3) the cultivation and development of value-added services falls short of expectations; 4) Due to the rigidity of labor costs and the slow formation of a dynamic property fee price increase mechanism, the company's single market profitability faces a downside risk.