Country Garden Services’ (CGS) revenue edged up by 3.0% YoY to RMB42.6bn, in line with our estimation. Gross margin narrowed by 4.3ppts to 20.5%, 3.4ppts below our estimation. Gross margin for all segments narrowed, with that for community and non-community VAS narrowed the most, by 14.1ppts and 12.6ppts, respectively. The former mainly due to decrease in some higher margin businesses, and the latter due to CGS stopping to recognise revenue from risky customers including related party since August 2023 while continuing to book related costs. SG&A as % of revenue declined by 1.5ppts to 9.9%, 3.7ppts below our estimation. CGS provided RMB1.5bn and RMB2.6bn impairments for goodwill and account receivables in 2023, respectively, causing reported net profit to drop by 85% YoY to RMB292m, 45.1% and 90.8% below BOCI and market estimations. Excluding one-off items, core net profit dropped by 21.6% YoY to RMB3.94bn, while operating cash flow amounted to RMB4.61bn. CGS maintained 25% payout ratio based on core net profit, and was 337% of reported net profit. We cut our 2024-25E core EPS by 27.1-28.9%, respectively, factoring in lower margin. Considering strong cash flow and cheap valuation, we maintain BUY rating on the stock.
Key Factors for Rating
New contracted area from third-party market expansion amounted to 76m sqm. Corresponding new contracted value amounted to RMB3.726bn, decreasing by 24% YoY. Among the 1,556 newly obtained projects from third-party, 36% were residential, 20% were public, 21% were commercial and offices, 14% were city management projects.
Community VAS revenue declined by 6.6% YoY to RMB3.75bn, largely due to decline in property market related businesses such as home decoration and property brokerage. As these sub segments are also with higher margin, gross margin of the segment narrowed by 14.1ppts to 39.4%. The decrease in gross margin was also partially attributable to CGS’s investment into establishing stronger product and service capabilities.
Key Risks for Rating
Slower economic growth could lead to decline in community VAS revenue.
Valuation
We rolled our P/E valuation to 2025E, and expanded our target P/E from 5x to 6x, considering significantly stronger than expected operating cash flow. The stock currently trades at 4.9x 2025E P/E, and 5.1% 2025E yield, which we think is undemanding, given strong cash flow and solid third-party expansion.