Core points:

• 1. Performance highlights:The optimization of revenue structure and the improvement of growth potential, the decrease of expense rate caused by scale effect, and the further increase of overall gross profit margin of the company, but affected by the increase of income tax rate, the net profit rate is basically unchanged.

• two。 Inadequacies:For the first time, the revenue of non-owner value-added services has declined compared with the same period last year, the gross profit margin of "three suppliers and one industry" property management services has dropped significantly, the acquisition of mergers and acquisitions has led to a sharp increase in intangible assets and the risk of impairment of goodwill, convertible bonds due on May 18, 2021 will further dilute their equity, and the 15% preferential income tax rate previously enjoyed will be lost.

• 3. Development goals:The management of the company proposed that by 2025, the contract area will exceed 1.8 billion square meters, and the revenue will reach 100 billion, including about 50 billion of property services, 30 billion of value-added services (including group buying), 15 billion + of business writing and business management, and 20 billion of urban services.

• In this regard, we believe that: 1) to achieve 1.8 billion contract area, then in the next five years, Country Garden Services Holdings's extension area should reach at least 100 million square meters per year. Property management service revenue is expected to achieve the 50 billion target; 2) the growth of value-added services will mainly rely on community value-added services, because the revenue growth space of non-owner value-added services is limited, and it is the only business segment with a decline in revenue in 2020. Taking into account: the average annual contribution of community value-added services revenue of a single community is only 528200 yuan, the average annual contribution of community value-added services revenue of each household is only 408.64 yuan, there is still huge room for growth. In addition, based on the linkage effect of the expansion of the scale of management and the growth of community value-added services, if Country Garden Services Holdings can achieve the target of 1.8 billion contract area, then community value-added services revenue exceeding 10 billion yuan should be a high probability event, as to whether it can break through 30 billion yuan. It needs to be tracked continuously; 3) the revenue target of 20 billion for urban services is expected to be achieved, but it is skeptical about the revenue target of 15 billion, which needs to be closely followed up.

• 4. Comprehensive analysisWe believe that Country Garden Services Holdings has successfully constructed multiple income pillars, and from the existing operating data, the rapid growth of its performance in the next three years has a considerable degree of certainty. As for its performance in 2020, on the whole, it is full of bright spots, although there are deficiencies, but the shortcomings do not cover the shortcomings.

Preface

As the absolute leader of the property management industry, Country Garden Services Holdings's every move has attracted the attention of the capital market, especially at the time of its annual results. This article is the interpretation and comment on its performance in 2020, which is mainly divided into the following three parts:

• First: interpretation of Country Garden Services Holdings's performance in 2020

• Second: a detailed analysis of the future performance growth space.

• Third: investment conclusions and risk tips.

In addition, it is worth mentioning that the rich way research team will also release Country Garden Services Holdings's valuation report in the near future, please look forward to it!

For more information, please see below.

I. interpretation of Country Garden Services Holdings's performance in 2020

Financial data: in 2020, Country Garden Services Holdings achieved a revenue of 15.6 billion yuan, an increase of 61.7% over the same period last year; gross profit increased by 2% from 32% in 2019 to 34% in 2020, corresponding to a gross profit of 5.3 billion yuan, an increase of 73.6% over the same period last year; and the net profit was relatively stable, falling 0.12% from 17.80% in 2019 to 17.68% in 2020, and the corresponding net profit was 2.78 billion yuan, an increase of 61.9% over the same period last year. In addition, the net profit of returning to the mother was 2.69 billion yuan, an increase of 60.8% over the same period last year.

In terms of business data: by the end of 2020, Country Garden Services Holdings's area under management reached 380 million square meters, an increase of 36.7% over the same period last year; the contract area reached 820 million square meters, an increase of 19.8% over the same period last year; from this we can see that Country Garden Services Holdings's reserve area is as high as 440 million square meters, even exceeding the current area under management. In other words, with the area under management by the end of 2020, it is enough to create another Country Garden Services Holdings.

To sum up, if we want to summarize Country Garden Services Holdings's financial report in 2020 in one sentence, it can be said that it is extremely in line with the aesthetics of mainstream institutions. After all, no matter from the revenue end, cost side, or core business data, future performance growth space and other dimensions, Country Garden Services Holdings's performance is very excellent, amazing, although there are some deficiencies.

Below, Country Garden Services Holdings's performance in 2020 will be interpreted according to the two major aspects of performance highlights and deficiencies.

1. Bright spot aspect

For the highlights of the annual performance, Country Garden Services Holdings's management has been refined into nine points, which can actually be summarized into three aspects: the revenue end, the cost end, and the profit side, which are analyzed one by one.

Revenue side: the specific performance is the optimization of revenue structure and the promotion of growth potential.

According to the data of the China Central Index Institute, the revenue of China's top 100 property management enterprises mainly comes from basic property management services, which generally account for 80%, while value-added services (including community value-added services and non-owner value-added services) account for only 20%. Judging from the changes in the revenue structure in the past five years, the proportion of Country Garden Services Holdings's basic property management services in total revenue has declined year by year, from 83% in 2016 to 55% in 2020. As for other businesses (including community value-added services, non-owner value-added services, urban services, "three supply and one industry" and other services), the combined proportion has increased to 45%, which shows that Country Garden Services Holdings's income sources are more balanced and diverse. The structure is more robust, and the effect of multiple track growth engines is gradually emerging.

As for the improvement of revenue growth potential, the specific performance is as follows:

• 1) the balance of contract liabilities / accounts received increased from 1.618 billion yuan in 2019 to 2.582 billion yuan in 2020.

• 2) the reserve area of the property management service sector, the largest business, is as high as 440 million square meters. even if any additional area is not considered in the future, according to the company's property fee unit price of 2.15 yuan / month / flat in 2020, the annual additional revenue for the company in the future will be as high as 11.352 billion yuan.

• 3) the third largest business-community value-added services. With Country Garden Services Holdings's continuous expansion of managed area and accelerating the exploration of community value-added services, the follow-up growth of this business is expected to surpass the "three supplies and one industry" to become the company's second largest business.

• 4) the fifth largest business-urban services, by 2020, the remaining outstanding amount of the contract is about 13 billion yuan, which will enter the fast track of development in the future.

Cost side: the specific performance is the decrease of the expense rate during the period brought about by the scale effect.

Previously, some investors were worried about the management of internal friction, but the data have proved that with the expansion of the scale of management, the management of internal friction does not exist, on the contrary, the scale effect is gradually highlighted.

Judging from the data of the past five years, Country Garden Services Holdings's period expenses accounted for 13.37% of total revenue, while the area of projects managed by him increased from 91 million square meters in 2016 to 377 million square meters in 2020.

In addition, if equity incentive fees are excluded, Country Garden Services Holdings's period expense rate is 11.87%, down 1.2% from 13.07% in 2019.

Profit end: the specific performance is the increase in the gross profit margin of the sub-business, but affected by the increase in the income tax rate, the net profit rate is basically unchanged.

In terms of gross profit margin, the company as a whole showed an upward trend, from 31.6% in 2019 to 34% in 2020. In terms of business analysis, the gross profit margin of property management services and non-owner value-added services increased significantly, while that of community value-added services was relatively stable, with the most obvious decline in property management income of "three supplies and one industry" and other services.

When the gross profit margin increases and the expense rate is relatively stable during the period, the net profit rate should be increased. However, because Country Garden Services Holdings's main subsidiary income tax rate changed to 25% from 15% in the same period in 2019, its income tax expenses increased by 160.9% year-on-year, from 358 million yuan in 2019 to 933 million yuan in 2020. In other words, the increase in income tax rates offset the increase in Country Garden Services Holdings's gross profit margin, so that its net profit margin remained at the 2019 level-17.8%.

To sum up, it is not difficult to see that Country Garden Services Holdings has realized conspicuously in terms of revenue growth, revenue structure optimization, follow-up growth potential, and cost control, so it is no exaggeration to say that it has handed over a satisfactory "answer" to the capital market.

Of course, there is no perfect financial report, as detailed in the following analysis.

two。 shortcomings

The inadequacies of Country Garden Services Holdings's 2020 financial report are as follows: the revenue of non-owner value-added services has declined for the first time compared with the same period last year, the gross profit margin of "three suppliers and one industry" property management services has dropped significantly, and mergers and acquisitions have led to a sharp increase in intangible assets. the risk of impairment of goodwill, convertible bonds due on May 18, 2021 will further dilute their equity, and the 15% preferential income tax rate previously enjoyed will be lost.

1) decline in revenue from value-added services for non-owners

Among Country Garden Services Holdings's six sectors of business, non-owner value-added services was the only business that recorded a decline, with a decline of about 3.7%, from 1.422 billion yuan in 2019 to 1.37 billion yuan in 2020. According to the explanation of the management, this is mainly due to the change in the business model of consulting services in non-owner value-added services.

In this regard, considering that the non-owner value-added services mainly come from the related party Country Garden Services Holdings, and the revenue of this division is mainly driven by the number of residential projects newly developed by Country Garden Services Holdings, especially the reclamation and cleaning and other special services and case consulting services in the non-owner value-added services, we believe that, based on the current situation of sales and sales area growth of Country Garden Holdings Group's development business-- single-digit growth. The space for the follow-up development of non-owner value-added services will be limited.

Note: Country Garden Services Holdings's non-owner value-added services mainly include: I) pre-sale business management consulting services of real estate developers and consulting services for properties managed by other property management companies; ii) provision of land reclamation cleaning, greening and maintenance services to property developers before delivery; and iii) agent sales and rental services for parking spaces and houses.

-supplement

2) the gross profit margin of "three suppliers and one industry" property management services has dropped significantly.

In 2018, Country Garden Services Holdings set up a joint venture with other companies and began to enter the field of separation and transfer reform of property management and heating in the "three supply and one industry]. By 2020, Country Garden Services Holdings has completed the transition from the gradual takeover stage to the full takeover stage in 2019.

Specifically, the business income of [three supply and one industry] currently includes the income generated by property management services and heating services, of which the fee management area and contract area of property management services of [three supply and one industry] are all 85.2 million square meters. this means that in the later stage, we can only rely on raising the unit price of the property fee of the [three supply and one industry] project, or developing community value-added services. After all, this part of the business cannot rely on quantity to drive growth.

It is also worth mentioning that the gross profit margin of property management services in the [three supply and one industry] business division dropped from 13.4% in 2019 to 7% in 2020. The official explanation is that the equipment of the property managed by the [three supply and one industry] business is old and the maintenance cost of the facility is high during the year.

As for the subsequent growth of heating services in the [three supply and one industry] business segment, after all, by the end of 2020, the charging area and contract area of heating services have been maintained at 42.34 million square meters.

And Country Garden Services Holdings is precisely because the expansion of the managed area of the [three supply and one industry] is blocked, and the gross profit margin of the project is low, so he speeds up the development of community value-added services of the [three supply and one industry] project, and relies on the deepening of cooperation with state-owned enterprises. and provide integrated logistics services for state-owned enterprises.

3) merger and acquisition leads to a sharp increase in intangible assets and brings the risk of impairment of goodwill.

As Country Garden Services Holdings acquired a number of enterprises in 2020, such as Urban Zhongheng, Manchuria Environmental Science and Technology, Fujian Dongfei and other companies, the corresponding increase in intangible assets was as high as 4.654 billion yuan, of which the new goodwill was as high as 3.145 billion yuan. If the performance of the target acquired in the later period is lower than expected, Country Garden Services Holdings will face the risk of goodwill impairment.

4) Convertible bonds maturing on May 18, 2021 will further dilute equity

According to the 2020 results announcement disclosed by Country Garden Services Holdings, a convertible bond of 3.548 billion yuan will mature on May 18, 2021, with an initial conversion price of HK $39.68 per share, which is much lower than the latest closing price of HK $72.40 per share. At that time, convertible bond investors will certainly exercise the conversion right, resulting in further dilution of the shares of existing shareholders. It is preliminary estimated that 97.66 million new shares will be outstanding at that time. Approximately 3.2 per cent of the total converted share capital (= 97.66 million shares / 3.04966 billion shares).

5) the 15% preferential income tax rate previously enjoyed will be lost.

Country Garden Services Holdings's pre-tax profit growth rate was as high as 79% in 2020, but net profit growth was 62%, much lower than the pre-tax profit growth. The core reason is that its core subsidiaries are affected by the expiration of their "high-tech enterprise" qualification in 2020. Lost the 15% preferential income tax rate previously enjoyed.

In response, the management said at the performance meeting that the company is still fighting for a preferential tax rate of 15%, but the final result has not yet come out.

So far, we have made a more comprehensive analysis of Country Garden Services Holdings's performance in 2020. In addition, no matter how excellent the past performance is, after all, it only represents the past, and investors are more concerned about the future development of the company, which is the issue to be discussed in the next part.

Second, a detailed analysis of the future performance growth space

First, take a look at the management's goals and plans.

At the performance conference, Country Garden Services Holdings management announced the five-year strategic goal, that is, the 2025 contract area target of 1.8 billion square meters, revenue of more than 100 billion. The specific composition is as follows: property management income 50 billion yuan, value-added services (including group purchase) 30 billion yuan, business writing 15 billion yuan, urban services 20 billion yuan; corresponding to the 5-year income and profit target CAGR50%. In addition, it is promised that the growth rate of revenue and net profit in 2021 will not be less than 50%.

Secondly, let's evaluate the feasibility of the above goals by business.

Based on the Boston matrix, Country Garden Services Holdings's current business can be divided into three categories.

The first category is cash cow business, which specifically corresponds to non-owner value-added services, [three supply and one industry] services and other services. the revenue growth of these three businesses is limited, and the growth rate is expected to be small in the future, but the investment is not large. therefore, it is classified as cash cow business, which is mainly responsible for contributing profits rather than growth.

The second category is star business, including property management services and community value-added services, which are also the most valued in the capital market. Country Garden Services Holdings currently has a reserve area of 440 million square meters. and it is expected that the annual contract area from Country Garden Holdings Group will be maintained at 67 million ~ 87 million square meters per year, with a total contribution of 335 ~ 435 million square meters in five years. If you want to achieve the target of 1.8 billion contract area in 2025, Country Garden Services Holdings also needs a contract area of at least 544 million square meters for extension and mergers and acquisitions, with an average annual increase of 100 million square meters through market-oriented expansion and mergers and acquisitions. It can be said that the pressure is still relatively great. After all, Country Garden Services Holdings's market expansion area in 2020 is 72.46 million square meters, which is still less than the minimum requirement.

As for value-added services, if we want to achieve 30 billion revenue, there is no doubt that it will be mainly contributed by the business division of community value-added services. By the end of 2020, including [three supply and one industry] projects, the number of Country Garden Services Holdings's property management projects was as high as 3277, covering 4.236 million owners across the country. If it is based on the revenue of 1.731 billion yuan in 2020, the average annual contribution of community value-added service revenue of a single residential area is only 528200 yuan, and the average annual community value-added service revenue of each household owner is only 408.64 yuan, there is still huge room for growth.

In addition, considering the linkage effect between the expansion of the scale of management and the growth of community value-added services, if Country Garden Services Holdings can achieve the goal of 1.8 billion contract area, then it is highly probable that the revenue of community value-added services will exceed 10 billion yuan. As for whether it can break through 30 billion yuan, it needs to be tracked continuously.

On how to achieve the revenue target of community value-added services, the management's answer at the performance meeting is: 1) scale growth. The new area has gradually matured and value-added services have been carried out. 2) the richness and diversification of the product line. As long as logistics, coupons and online transactions are accessible, they are all consumption that can be captured by community value-added services. This depends not only on the ability of Country Garden Services Holdings, but also on the ability of the partners. 3) Integrated marketing. Look at the team, incentive mechanism, marketing methodology and so on.

The third category is the potential to become a star business, may also become a problem business, including urban services and exploring business writing business. The management's goal is to achieve 15 billion yuan in revenue from business and 20 billion yuan from urban services by 2025. In this regard, considering that the policy is favorable for the property management company to undertake government public property projects and the remaining unexecuted contract amount of about 13 billion yuan for the urban service branch by the end of 2020, we believe that the urban service revenue target is more likely to be achieved. however, he is skeptical about the development of business and writing business. after all, although Country Garden Services Holdings is a residential expert, there is basically no deep precipitation and accumulation in the field of commercial office buildings. Relatively not optimistic about such aggressive revenue targets.

However, the management is very optimistic about the business writing business, they put forward at the performance meeting: for the business writing business, Country Garden Services Holdings set up a special team, but also assigned tasks, carried out model research and evaluation and empowerment. Country Garden Services Holdings is a residential expert, the proportion of business writing is relatively low, but the management believes that it is not too late to do business writing, now is the period of great integration of the industry, Country Garden Holdings will adhere to brand development, equity cooperation. The promotion of this part of the business is relatively good at present, and will gradually achieve results. In this regard, we will keep a close follow-up.

Investment conclusion and risk hint

Based on the analysis, we believe that Country Garden Services Holdings has successfully constructed multiple income pillars, and from the existing business data, the rapid growth of its performance in the next three years has a considerable degree of certainty. As for its performance in 2020, on the whole, it is full of bright spots, although there are deficiencies, but the shortcomings do not cover the shortcomings.

However, considering that Country Garden Services Holdings's stock price has overdrawn the performance growth in the next 1 to 2 years, it is still necessary for investors to pay attention to the risk of short-term stock price fluctuations, of course, if Country Garden Services Holdings management can really achieve its five-year development goal, then Country Garden Services Holdings's medium-and long-term investment value space is still very huge.