Greentown Mgmt’s stock price plunged 32% post-1H24 earnings, partly due to the uncertainty on strategy execution among investors following the resignation of former CEO Mr. Li Jun. More importantly, the pullback was due to revenue/net profit deceleration (8%/6% YoY vs. guidance of 20%/30%), constrained by declining client payment capacity and heightened competition. A 19% YoY drop in new contract value reflects 1) reduced land supply, 2) slow sales recovery which dampened clients’ confidence in development, and 3) insufficient funds to start projects. We see low visibility of quick recovery of property sales in the near term and revise down our 2024-26E revenue expectations by 17-27% to YoY growth of 5%/9%/7%, and profit forecasts by 20-38% to YoY growth of 3%/9%/8%. However, we believe the long-term demand for PJM remains intact, given the recovery of property sales. We maintain our BUY rating with TP cut by 41% to HK$5.56, representing 10x 2024E P/E. Risk: account receivable impairment.
Revenue dragged by government PJM. In 1H24, revenue increased by 8% YoY to RMB17.6bn (below the 20% target). Contract assets rose 25% YoY to RMB12bn, reflecting delays of landowner payment. Government PJM revenues declined 16% YoY, as economic weakness slowed investments and reduced payment capacity of government. Commercial PJM revenues grew 23% YoY, mainly due to the support from revenue linked to property sales, with contract sales up 14% YoY to RMB41.1bn in 1H24, significantly outperforming peers (NBS property sales -25% YoY, TOP 100 developers - 41% YoY). Construction progress-related revenues potentially declined, as developers' construction pace slowed in the current challenging environment.
Weakening demand + intensifying competition. New contract value declined by 18% YoY to RMB419mn in 1H24, with SOEs/FIs/Gov./POEs down -25%,/-17%/-12%/ -9% YoY, respectively. Such decline was due to:1) SOEs: low start rates for project from LGFVs, 2) financial institutions: less problematic defaulted projects have been taken over, with more complex ones left, 3) government: less affordable housing construction needs given fiscal constraints and policy-driven inventory acquisitions, and 4) privately owned enterprises (POE): reduced land acquisition and developer confidence. However, the decline was smaller for POEs, possibly benefiting from the company's integrated light and heavy asset strategy facilitating project flow. ASP of new contract signed in 1H24 fell sharply by 19% to RMB240/sqm, indicating intensified competition. This is corroborated by a 0.5ppt YoY decrease in gross margin, with ongoing pressure expected.
What is next: Without a sales upswing in Sept & Oct to boost landowner confidence, 2H revenues and contract signings may be affected. In the long term, the demand for PJM services is sustainable, even though the pace may depend on recovery of property sales, given 1) the substantial base of LGFVs projects, after grappling with land transfers and equity introductions, will ultimately opt for PJM services. 2) PJM firms will continue to innovate, offering standalone services such as design, cost control, and sales management, complementing full-process PJM. The company has already tapped into the renovation of older residential areas and will expand further. 3) Acting as a platform to integrate resources en masse is a key advantage, enabling the initiation of more underfunded projects and driving growth in PJM demand.
Valuation. We revised down 2024-26E revenue by 17-27% to YoY growth of 5%/9%/7%, and net profit forecasts by 20-38% to YoY growth of 3%/9%/8%, to reflect the challenges mentioned above. While we think long-term demand for PJM remains, we maintain BUY rating with a TP cut of 41% to HK$5.56, representing 10x 2024E P/E.