We think S-enjoy may face further de-rating on 1) corporate governance issue to invest in high-risk USD bonds that caused ~RMB150mn loss in 2H21. It’s worth noting that it has invested additional RMB156mn into USD bonds in 1H21 after RMB1bn placement and may face more haircuts. 2) 2021 results was a miss on the investment loss and the Company cut the dividend payout to 25% (50% in 2020). 3) Margin downward pressure. As a result, we downgrade to SELL rating and the catalyst is more USD bond price falling.
　　2021 results - big miss and dividend cut: The Company delivered 16% YoY　growth in 2021 earnings at RMB525mn, below our 2021E estimate by 23%.The huge miss was mainly due to RMB250mn loss on financial and other assets (detailed analysis below). The total revenue grew 52% YoY to RMB4.35bn in 2021 mainly driven by PM (+67% YoY) and Community VAS segments (+84% YoY). GP Margin widened slightly of 0.1ppt YoY to 30.8% in 2021. However, NPM was lowered to 12.1% in 2021 (-3.7ppt YoY). EPS was RMB0.62/share (+13% YoY) and the Company took a big cut in dividend at HK$0.155/share (-45% YoY), representing 25% payout ratio (-26ppts YoY).
　　Corporate Governance concern after loss in USD bond investment: S-　enjoy held RMB342mn-worth USD bonds of listed companies as of 1H21. We estimate it has recorded >RMB150mn loss in 2H21 based on balance sheet figure as of Dec 2021. This may cause investors’ concerns on 1) financially, it may face more bond value loss given the worsening market. 2) The corporate governance issue of using cash to buy risky assets. Especially, it has invested additional RMB156mn cash into the USD bonds in 1H21 (RMB1bn placement in Mar 2021). We forecast another RMB100mn loss by 1H22E.
　　Margin to face more downside risks: On basic PM business side, it has shown steady progress in third-party expansion, contributing 27% of contracted GFA increase. However, the current PM margin seems too high at 30%, and may face downward risk given higher costs and more third-party projects. For Community VAS, the current pandemic may impact several business lines. Also, its margin may decline after the merge of catering business of Shanxi Xuefu at RMB200mn revenue in 2022E. Therefore, we expect overall group margin to decline from 31% in 2021 to 27-29% in 22-24E.
　　Downgrade to SELL: To reflect above, we revise down 2022/23E net profits by 18/5%. As a result, we derived our new target price at HK$8.48/share by using x 8x 2022E PE (in line with industry average of mid to small players).