1H24 results slightly exceeded market expectations

The company announced 1H24 results: revenue increased 6% year on year to 3.37 billion yuan, net profit to mother increased 10% year on year to 0.27 billion yuan, slightly exceeding market expectations, mainly benefiting from increased gross margin of some businesses and continued decline in sales management rates. The company plans to distribute an interim dividend of HK$0.12 per share, increasing the dividend ratio to 70% (including 50% ordinary dividend, 20% special dividend, and 30% 1H23 dividend ratio).

The scale of external development bucked the trend, and value-added services were under pressure under environmental pressure. At the end of the first half of 2024, the company's management area increased by a net of 15 million square meters to 0.236 billion square meters at the end of 2023, an increase of 15% over the previous year; the corresponding annual contract amount for third-party development reached 0.8 billion yuan (corresponding contract area of 37 million square meters), a sharp increase of 48% over the previous year. In the first half of the year, the company continued to promote strategic focus and made good breakthroughs in some deeply cultivated cities. The scale of value-added service revenue has shrunk due to environmental impact. In the first half of the year, revenue from value-added services and community value-added services for non-owners decreased by 4% and 3% year-on-year to 0.36 billion yuan and 400 million yuan, respectively.

Operating efficiency has improved, and accounts receivable and cash flow performance is steady. In the first half of 2024, the company's gross margin of basic property management increased 1.8 percentage points to 20.5% year on year. On the one hand, the company continued to withdraw from some non-core cities and inefficient projects, and on the other hand, core cities continued to increase project density; marketing and management rates fell 0.5 percentage points to 7.2% year on year, mainly benefiting from continuous optimization of management levels and control costs. Account recovery in the first half of the year showed good resilience. Among them, the current collection rate increased slightly compared to last year, with a net operating cash flow inflow of 0.1 billion yuan, which was basically the same; the size of accounts receivable increased by 0.24 billion yuan to 2.69 billion yuan from the end of 2023. The increase was well controlled, and the balance of accounts receivable from related parties also declined.

Development trends

Adhere to the Five-Year Plan and pay attention to shareholder returns. The company is firm in its double-digit revenue and profit growth target for the “25th Five-Year Period”, and net profit covers about 1 times the net operating cash flow. We expect the company and business to continue to expand steadily in the future as the company's governance, business model adjustments, and related parties' accounts receivable side continues to improve. The company also paid more attention to shareholder returns. The dividend payout ratio was raised to 50% in 2023, and the dividend payout ratio was raised to 70% in the first half of 2024 (50% regular dividend, 20% special dividend; the company aims to pay no less than 50% in the next three years); from November 2023 to July 2024, the company also bought back 20.67 million shares, accounting for 1.2% of the total share capital.

Profit forecasting and valuation

The profit forecast remains basically unchanged. The company's net profit to mother is expected to increase 11% and 10% year-on-year in 2024 and 2025, respectively. Maintaining the outperforming industry rating, the target price was raised by 33% to HK$2.2 (corresponding to the target price-earnings ratio of 7.1 times in 2024 and the target price-earnings ratio of 6.3 times in 2025 and the target dividend yield of 10% in 2024, implying 27% upward space), mainly considering the company's potential attractiveness in terms of dividend yield. The company currently trades at 5.6 times the 2024 price-earnings ratio and 4.9 times the 2025 price-earnings ratio and the expected dividend yield of 12.5% for 2024.

risks

The development of value-added services falls short of expectations, and the risk of accounts receivable repayment and impairment exceeding expectations.