2021 results in line with our expectations
A-Living Services announced its 2021 results: Revenue rose 40% YoY to Rmb14.08bn and net profit grew 32% YoY to Rmb2.31bn, in line with our expectations. Net profit growth was slower than revenue growth due to a slight decline in profit margin of niche businesses and amortization of intangible assets from M&As, in our view. The firm announced a dividend of Rmb0.41/sh for 2021, with a payout ratio of around 25%, implying a dividend yield of about 4.4%.
　　Expansion of managed GFA well on track. The firm’s managed GFA at end-2021 grew 30% YoY to 489mn sqm, 42.5% of which were residential properties 57.5% of which were non-residential properties. New managed GFA reached 114mn sqm. Specifically, net increase in managed GFA from Agile and Greenland Holdings exceeded 12mn sqm in 2021, 44mn sqm of managed GFA was from third-party bidding projects, and 57.6mn sqm was from M&As (consolidation of New CMIG PM and Shandong Hongtai contributed 42.6mn sqm and 39.4mn sqm; we exclude 24.4mn sqm from the sale of Lanzhou Chengguan). The firm’s contracted GFA rose 27% YoY to 663mn sqm at end-2021, and newly-added contracted GFA from third-party bidding was about 69.3mn sqm in 2021.
　　Growth of extended VAS slowing; VAS to property owners growing steadily. The firm’s 2021 revenue from extended VAS rose 15% YoY to Rmb2.86bn, due to the downturn of the real estate market. Revenue from value-added services (VAS) to property owners surged 77% YoY to Rmb1.87bn driven by the growth of living and comprehensive services (2021 revenue at Rmb851mn, up 115% YoY) and home improvement services (2021 revenue of Rmb243mn, up 105% YoY). The firm’s 2021 revenue from city services reached Rmb698mn due to the consolidation of acquired projects, accounting for 5% of total revenue.
　　GM fell; expense ratios rose slightly. The firm's 2021 blended gross margin fell 2.2ppt YoY to 27.5%, with that of basic property management services dropping 1.7ppt YoY to 20.1%. We attribute this to the rising proportion of third-party projects and amortization of intangible assets from M&As. Gross margin of VAS to property owners fell 7.5ppt YoY, mainly due to changes in business structure (rising revenue contribution from low-GM home improvement services and new retail business). The firm’s SG&A expense ratio rose 0.3ppt YoY to 6.5%, mainly due to higher selling expenses from third-party project expansion.
　　Trends to watch
　　Extended VAS may be under pressure; suggest watching changes in real estate development market. We expect the firm’s core business to continue to grow steadily with a CAGR of 20-25% in revenue in the next 3 years. We think revenue and profit margin of extended VAS may be under pressure as we see uncertainties in sales center property management services and the property agency business due to the downturn in the real estate market (Agile, the firm’s parent company, had not acquired any land since December 2021, and its 1Q22 sales dropped 47% YoY). We suggest watching the overall operation of Agile in terms of sales and land acquisition.
　　Financials and valuation
　　Given the downward pressure on revenue and profit margin of extended VAS, we lower our 2022 and 2023 earnings forecasts 5% and 10% to Rmb2.75bn (up 19% YoY) and Rmb3.24bn (up 18% YoY). Maintain OUTPERFORM but cut TP 43% to HK$13.6 (as volatility in the real estate market may weigh on the firm's medium to long term growth), implying 6.0x 2022e P/E with 20% upside. The stock is trading at 5.1x 2022e P/E.
　　Risks
　　Disappointing community VAS and/or city services; downside surprise in extended VAS.