The resurgence of COVID-19 during 4Q22 had larger-than-expected impacts on both property development and property management sectors. A-Living’s related party saw their contracted sales declining by more than 70% YoY in November and December, compared to less than 60% in October. Considering the difficulties faced by Agile, we cut our estimation for revenue from Agile （extended VAS） in 2022E by 14.5% to RMB1.86bn. We also cut our 2022E community VAS revenue by 3% to RMB2.40bn considering disruptions from the COVID-19 outbreak. Meanwhile, we lowered our 2022E gross margin from 25.7% to 24.8% due to less contribution from extended VAS. In addition, we increased our operating expenses by 17% to RMB1.19bn to reflect potential impairment on account receivables, as cash collection from Agile is likely to be affected by the COVID-19 situation. As a result, we cut our 2022E EPS by 13.3%, and lowered our TP to HK$14.73. Given intact organic growth capability of A-Living, reduced contribution from Agile （2022E: 11.4% vs 2021: 20.3%）， and one-off nature of COVID-19 outbreak, we maintain BUY rating on the stock.
　　Key Factors for Rating
　　Despite disruptions from COVID-19, A-Living had already secured its 70m sqm new addition to contracted GFA according to management’s guidance given in November, equal to 14.3% of its total GFA under management of 488.9m sqm at end-2021. The vast majority of the new GFA was added through organic market expansion from third parties, demonstrating A-Living’s intact organic growth capabilities. The company maintains strong competitiveness in the public sector, with 60% new GFA from non-residential segment in 3Q22. The new GFA is not much inflated by large projects such as parks, with average management fee of non-residential segment remaining at above RMB2/month/sqm.
We believe the disruption from COVID-19 also impacted A-Living’s cash collection in 4Q22. The company suffered from RMB1.4bn operating cash outflow in 1H22, while had been generating positive operating cash flow since 2H22 according to management guidance in November. We reckon such positive cash flow was impacted by COVID-19 outbreak in 4Q22, and estimate FY22 operating cash flow to remain slightly negative. In addition, we estimate RMB172m AR impairment in 2H22 on top of RMB250m in 1H22.
　　Key Risks for Rating
　　Weak operating cash flow may continue in 2023
　　Valuation
　　Due to risk of potential weak cash flow and results for 2022E, we lower our target 2023E P/E from 7x to 6.5x. The stock currently trades at 4.0x 2023E P/E, which we think is cheap as such valuation factors in no growth at all, while the company’s organic growth capability is intact.