Action
　　We downgrade A-Living Services from OUTPERFORM to NEUTRAL.
　　What’s changed?
　　Non-cyclical business steadily developing; real estate related business dragging 1H22 earnings and cash flow. A-Living Services announced that its 1H22 revenue rose 22% YoY to Rmb7.62bn and attributable net profit fell 7% YoY to Rmb1.06bn, missing market expectation. Specifically, non-cyclical businesses such as basic property management services, community value-added services (VAS) and city services continued to develop steadily. 1) Basic property management services: The firm expanded its contracted GFA from third-party projects by about 35mn sqm in 1H22 with contract value rising 9% YoY to about Rmb1.2bn, maintaining steady growth. 2) Community VAS: Revenue from the segment grew 34% YoY (over 40% YoY for both living and comprehensive services and home improvement services). However, for real estate related businesses, the firm’s revenue and gross profit of extended VAS fell by 24% and 32% YoY due to downturn in the real estate sector. This also weighed on the firm’s cash flow (1H22 new trade and other accounts receivable from related parties at Rmb1.7bn).
　　We still see uncertainty in property development ahead. Data from the National Bureau of Statistics shows the decline in real estate sales accelerated in July, and the boost to demand from policy support since 2Q22 significantly weakened. Looking ahead, the Politburo meeting in July reiterated the support for meeting demand of first home buyers to upgraders and stressed the better utilization of city-specific policy tools. We foresee increased policy support under the framework of “housing is for living in, not for speculation", but the actual policy impact may depend on whether the efforts to ensure the delivery of property projects will effectively improve expectations for home purchases. We still see uncertainties in full-year sales. The firm’s parent company Agile reported January-July sales value of Rmb44.5bn, down 47% YoY and remaining sluggish. We estimate that Rmb2.45bn of domestic bonds and US$400mn of overseas bonds issued by Agile will either mature or become puttable in 2H22, and believe that funding pressure will likely linger in the near term. Agile holds a 48.1% equity stake in A-Living Services, and accounted for 17% of its gross profit from extended VAS in 1H22. We think the operational pressure on Agile will bring uncertainty to A-Living’s income statement and balance sheet.
　　How do we differ from the market? The firm is entering a period of structural adjustment, and has yet to digest the impact from the real estate downturn.
　　Potential catalysts: Persistent uncertainty around real estate development; weak performance of extended VAS.
　　Financials and valuation
　　We lower our 2022 and 2023 earnings forecast 20% and 24% to Rmb2.19bn (-5% YoY) and Rmb2.45bn (+12% YoY), considering the significant pressure on the revenue and profit margin of extended VAS business and steady growth of non-cyclical business ahead. We downgrade A-Living Services to NEUTRAL and cut our TP 34% to HK$9.0 (5x 2022e P/E with 8% upside) to reflect our earnings forecast revision and increased uncertainty. The stock is trading at 4.7x 2022e and 4.2x 2023e P/E.
　　Risks
　　Stronger-than-expected recovery in parent company’s financials and operations.