1H24 results are in line with previous profit warnings and market expectations

The company announced 1H24 results: revenue increased 2% year over year to 21.05 billion yuan, net profit to mother fell 39% year on year to 1.44 billion yuan. Excluding factors such as impairment of goodwill and related receivables and amortization of intangible assets caused by mergers and acquisitions, the company's adjusted core net profit fell 32% year on year to 1.84 billion yuan, in line with the previously announced profit warning range.

The scale of core business was stable in the first half of the year. Profits declined year on year, but stabilized month-on-month. By the end of the first half of 2024, the company's management area reached 1.01 billion square meters, up 10% year on year, corresponding to a 5% year-on-year increase in basic property management revenue to 12.75 billion yuan; revenue from community value-added services increased 6% year over year to 2 billion yuan, mainly due to the rapid growth of local lifestyle services centered on community retail. At the gross margin level, basic property management and community value-added services stabilized compared to the full year of 2023 (+0.8 and -0.4 percentage points, respectively), and decreased by 3.1 and 9.7 percentage points, respectively. This is mainly due to the company's more careful revenue recognition for risk customers and an increase in community revitalization expenses since the second half of last year. Community value-added services are mainly due to a decline in the share of high-margin community media and other businesses.

Due to environmental impacts, collection rates have declined, and cash flow performance is under pressure. As of the end of the first half of 2024, the balance of the company's trade receivables increased by 2.45 billion yuan to 21.96 billion yuan compared to the end of 2023 (the additional amount mainly came from third parties). Of these, trade receivables over one year accounted for more than 40%, and the average account age also increased; operating cash flow inflows in the first half of the year were 0.27 billion yuan, a significant decrease from the first half of last year (1H23 was 2.19 billion yuan), mainly due to the weak year-on-year collection rate of risky merchants and C-side owners. The impact of factors such as falling property fees and capital fluctuations due to daily operations.

Development trends

The core business is still in its infancy. Investors are advised to pay attention to the balance sheet risk settlement process, while also focusing on later expectations and market value management actions. The company's core business is still in the refinement stage. Considering the current external environment, we expect that the company's short to medium term business priorities may continue to focus on improving the quality of the residential-based core business and improving internal operation capabilities. We recommend that investors continue to pay attention to the company's performance in accounts receivable and operating cash flow, as well as the corresponding risk of impairment of assets such as accounts and goodwill. At the same time, they also pay attention to marginal changes in the company's subsequent market value management and expected management actions such as potential repurchases and dividends.

Profit forecasting and valuation

Based on prudent assumptions about gross margin and balance sheet pressure in the segmented business, we lowered our 2024 and 2025 core net profit forecasts by 22% and 21% to $3.23 billion (down 18% year over year) and $3.34 billion (up 3% year over year), and corresponding net profit to mother decreased by 11% and 21%, respectively. Maintaining a neutral rating, the target price was lowered by 22% to HK$4.3, corresponding to the target return to mother/core price-earnings ratio of 5.4/4.0 times in 2024, implying 4% upward space. The company is currently trading at 5.2/3.9 times the mother/core price-earnings ratio in 2024.

risks

Risk of continued impairment of goodwill and accounts receivable, risk of continued decline in gross margin of segmented businesses, etc.