After a strong beat in 2021 earnings, we think its new earnings guidance of 25% CAGR in 2021-24E is better than feared given parentco’s debt crisis. To achieve that, we think community VAS has high potential to grow at >50% CAGR due to its low penetration rate (measured by VAS/Managed GFA at RMB2.4/sq m in 2021 vs. industry of RMB5/sq m) to support the overall revenue growth and margin. For basic PM, the third-party expansion would drive the growth to lessen the impact of Sunac’s GFA delivery and can still support 30% CAGR. After reflecting that in earnings, it is currently trading at 8x 2022E PE which we think has priced in almost all the negatives. Attractive risk/reward and Maintain Buy.
　　Parentco risk alleviated on its transparent corporate governance:　management has reiterated its independency when working with parentco.For example, it has never bought any investment products nor had any guarantee for Sunac. As for the account receivables from its parentco, it will also try their best to collect just like other companies.
　　Community VAS would be the key to drive earnings growth: As the other　two segments impacted by the property downcycle and debt crisis, Community VAS would take the lead to drive future growth. We think there is ample room to increase as its current VAS/managed GFA was only RMB2.4/sq m, much below industry average of RMB5/sq m. This implies very low penetration rate as Sunac services just started. We forecasted its VAS/managed GFA to catch up with industry by 2024E at RMB5/sq m.Together with decent GFA growth, we expect Community VAS to grow 58% CAGR in 2021-24E and contribute 12% of total revenue by 2024E.
　　Commercial operation could be a surprise in the mid-to-long term: After　acquiring Sunac’s commercial operation arm last year, the Company has managed its malls and achieved 25% growth in retail sales and rental income of RMB1bn. In addition, it also successfully expanded five third-party malls via light asset model, which is even more than its own opening last year. If the light asset model is sustainable, we believe Sunac Service may grow more meaningfully in the future (GPM as high as 75%).
　　Maintain Buy: We cut 2022/23E revenue by 26%/37% to reflect a slower GFA delivery from parentco and stagnant growth in non-owner VAS. GPM/NPM is estimated to see 3/2ppt YoY contraction in 2022E due to mix change (less non-owner VAS that has higher margin) but remain stable afterwards. As a result, we cut net profits of 2022/23E by 24%/39% to RMB1.5bn/1.9bn and it implies 21% NP growth CAGR in 2021-24E. Our new target price is HK$7.02/share (+36% upside) based on 12x 2022E PE reflecting parent risk.
　　2021 results - beat: The Company delivered 114% YoY growth in 2021 earnings at RMB1.3bn, beating its profit alert of 100% by 14ppts and is one of the fastest growing PM companies. The total revenue grew 71% YoY to RMB7.9bn in 2021 mainly driven by its Community VAS segment (+188% YoY), growth in its basic PM segment (+64% YoY) and new business segment community operational services (+6527% YoY). GP Margin boosted 3.9ppt YoY to 31.5% in 2021. NPM also widened 3.2ppt YoY to 16.1% in 2021. EPS was RMB0.41/share (+64% YoY) and the Company declared a dividend of RMB0.124/share (+114% YoY), representing a 30% dividend payout ratio (+7ppts YoY).
　　GP margin rose to 32% in 2021: This GPM increase is mainly driven by PM services at 25.7% (+4.1ppts YoY) and commercial operational services at 79.2% (+58.3ppts YoY). This increase is due to GFA brought scale effect/cost reduction (and digitalization) and the consolidation of Rongle Times in early 2021.
　　Basic PM: PM segment recorded RMB4.5bn in 2021 (+64% YoY) mainly driven by increase in third-party revenue of RMB1.4bn (+112% YoY). The GFA contributed by third-party accounted for 37% (+5ppts) in 2021. The Company gave guidance that third- party GFA will make up >50% by 2024. This is needed for making up of slowed sales from parent co and anticipating a slower parent co GFA conversion rate.
　　Community VAS: In 2021, the Company’s community VAS segment grew 188% YoY to RMB507mn, mainly driven by convenience services (+596% YoY to RMB67mn in 1H21), brokerage business (+175% YoY) and home decoration (+142% YoY). Its contribution to the 2021 group revenue has doubled to 6% vs. 4% in 2020, which has beat our expectation (5% in 2021E).