Under the dual pressure of internal and external troubles, KANGQIAO SER (02205) is deeply trapped in a situation where revenue is not increasing but profits are not improving.

In the first half of 2024, KANGQIAO SER (02205) is still deeply trapped in the dilemma of increasing revenue without increasing profits. According to the financial report, in the first half of 2024, the company's revenue was 487 million yuan, a year-on-year increase of 9.5%; the profit attributable to owners of the company was 42.811 million yuan, a year-on-year decrease of 15.8%. It is worth mentioning that this is the fourth consecutive year that the company's annual profit and net profit attributable to owners have declined. Looking back at the timeline from 2021 to 2023, KANGQIAO SER's annual profit decreased year-on-year by 3.5%, 25.8%, and 20% respectively; and net profit attributable to owners decreased year-on-year by 5.1%, 35.5%, and 28.9% respectively. With continuous decline in profit performance, can KANGQIAO SER overcome its profit dilemma? Under "internal troubles" and "external threats", deeply trapped in a profit dilemma It is believed that the profit dilemma of KANGQIAO SER stems from industry pressure testing and its own unsatisfactory financial performance: Firstly, the growth rate of basic property management income in the property management industry has continued to slow down, and the scale of non-owner value-added services has shrunk. Using 18 property companies as samples in 2023, the total basic property management income (including commercial operations) was 143.1 billion yuan, a year-on-year increase of 14%, a decrease of 21 percentage points compared to 2022; the total income from non-owner value-added services was 15.4 billion yuan, a decrease of 16% year-on-year, with a 9 percentage point increase in the decline. Among them, private enterprises were most affected, with the growth rate of basic property management service income for private enterprises declining from 40% in 2022 to 9% in 2023. At the same time, private enterprises experienced more severe business shrinkage due to the greater decline in sales of related real estate companies, with the decline increasing from 31% in 2022 to 45% in 2023; state-owned enterprise income remained basically the same as the previous year, with a slight decrease of 1% year-on-year. With pressure on new home sales in 2024, it is expected that this business will continue to shrink in 2024. As a private property company, KANGQIAO SER naturally cannot escape from the shadow of the industry. Especially since most of its non-owner value-added services come from development projects of related real estate companies, which are closely related to the sales growth and payment ability of related real estate companies. With the decline in sales volume of related real estate companies and the tightening of cash flow, non-owner value-added service income has also declined. Therefore, KANGQIAO SER's non-owner value-added services have been greatly affected. In the first half of 2021, the company's non-owner value-added service income was 172 million yuan, accounting for 43.4% of total revenue; by the first half of 2024, the income of this division was only 56.9 million yuan, accounting for 11.7% of total revenue. In addition, the growth rate of property management services has slowed down. In the first half of 2024, the company's property management service income was approximately 335 million yuan, accounting for 68.8% of total revenue, with an 18.5% year-on-year increase. This is significantly lower than the 36% growth rate in 2021. The high-grossing non-owner value-added services facing a "cut-off" and the slowing growth of basic property management services have led to a continuous decline in KANGQIAO SER's profit margin. From the first half of 2021 to the first half of 2024, the company's profit margins were 28.29%, 28.42%, 25.17%, and 21.66% respectively; and during the same period, the ROE was 38.88%, 7.22%, 6.89%, and 6.00% respectively. Secondly, from KANGQIAO SER's own perspective, its financial discipline performance is unsatisfactory. For example, a significant increase in trade accounts receivable has led to an increase in credit impairment loss. In the 2023 fiscal year, the group's credit impairment loss was approximately 88.648 million yuan, an 85.7% increase compared to the same period in 2022. The main reason for the increase is the overall downward trend in the real estate market, which has led to a reduction in the repayment speed of trade and other accounts receivable from related parties, and an increase in the expected credit loss rate in the real estate industry. This has led to a significant increase in the provision for expected credit losses on related party accounts receivable compared to 2022. As of June 30, 2024, KANGQIAO SER's trade accounts receivable reached approximately 771 million yuan, an increase of 13.9% from the approximately 677 million yuan at the end of 2023, indicating a slow repayment speed of trade and other accounts receivable. In short, the downward trend in related party real estate has led to a decrease in the volume of its high-margin business, and the real estate liquidity crisis has resulted in a large amount of bad debts in accounts receivable, greatly affecting the company's profit level, leading to a difficult situation of increasing revenue without increasing profits. Under the combined influence of external threats from related industries and internal financial concerns, other financial indicators of KANGQIAO SER are also showing a downward trend. As of June 30, 2024, the company's cash and cash equivalents were approximately 337 million yuan, a decrease from the 356 million yuan at the end of 2023; and the company's debt ratio (total liabilities divided by total assets) during the same period was 43.7%, an increase of 4.7 percentage points from the end of 2023. Exploring new growth points in non-residential and urban services? In the first half of 2024, the property industry is in a new cycle of transitioning from incremental to stock, returning to the essence of service, and enhancing service value, with continuous valuation adjustment. As the industry returns to a path of high-quality and steady development, it is crucial for enterprises to enhance their internal strength for long-term success. Based on this foundation, the growth logic and performance of property enterprises will be more sustainable. Due to the continuous decline in overall new investment in real estate, in recent years, KANGQIAO SER has not increased the contract construction area from related party Kangqiao Real Estate Group, and the support from related parties has weakened. This has forced KANGQIAO SER to further strengthen its ability to tap into the third-party market. As of mid-2024, the contract construction area for property management services was approximately 71.1 million square meters, an 8.5% increase from 2023; of which approximately 58.4 million square meters came from third-party property developers, accounting for 82.2%; the managed construction area was approximately 43.2 million square meters, a 17.1% increase from 2023, of which approximately 34.5 million square meters came from third-party property developers, accounting for 79.8%. With the decline in non-residential property volume due to the downstream of related real estate, and the real estate liquidity crisis leading to a large amount of bad debts in receivables, KANGQIAO SER's profit margin continues to decline. From the first half of 2021 to the first half of 2024, the company's profit margin was 28.29%, 28.42%, 25.17%, and 21.66% respectively; and during the same period, the ROE was 38.88%, 7.22%, 6.89%, and 6.00% respectively. In view of KANGQIAO SER's own performance, its financial performance is not satisfactory. For example, the large increase in trade accounts receivable led to a higher credit impairment loss amount. In 2023, the group's credit impairment loss was approximately 88.648 million yuan, an increase of 85.7% compared to the same period in 2022. The main reason for the increase is the impact of the overall downturn in the real estate market, which has reduced the repayment speed of trade and other accounts receivable from related parties and increased the expected credit loss rate in the real estate industry, leading to a significant increase in the provision for expected credit losses on related party accounts receivable compared to 2022. As of June 30, 2024, KANGQIAO SER's trade accounts receivable reached approximately 771 million yuan, an increase of 13.9% from the approximately 677 million yuan at the end of 2023, indicating a slow repayment speed of trade and other accounts receivable. In short, the downturn in related party real estate has led to a decrease in the volume of its high-margin business, and the real estate liquidity crisis has resulted in a large amount of bad debts in accounts receivable, greatly affecting the company's profit level, leading to a difficult situation of increasing revenue without increasing profits.The proportion from third-party property developers is approximately 99.2%.The proportion of third-party property developers accounts for about 80%, especially the deep cultivation of non-residential properties, further demonstrating the company's market development capabilities. However, as the proportion of third parties increases, the property management service gross profit margin of KANGQIAO SER has decreased from 23.7% in mid-2023 to 21.4% in mid-2024. In addition to non-residential formats, urban services are also new growth points that KANGQIAO SER urgently needs to explore. During the period, urban service revenue was 37.486 million yuan, an increase of 32.0% year-on-year. However, at present, the business scale is small with low profitability. The proportion of total revenue during the period is only 7.7%, with a gross profit margin of 12.5%, indicating that it is still a tough business. Moreover, in the urban services track, leading enterprises have already made their own unique business models and service brands, such as ONEWO's "ONEWO City", POLY PPT SER's "Zhenxing China", CG SERVICES' "Urban Symbiosis Plan", and CHINA RES MIXC's "Wanxiang Service". In the face of leading enterprises making their mark in the market, KANGQIAO SER's growth in the urban services track is also a battle to break through. Overall, under internal and external challenges, KANGQIAO SER is deeply stuck in the quagmire of increasing revenue without increasing profits, with other key financial data also deteriorating, such as cash flow and asset-liability ratio. Focusing on non-residential and urban services tracks has become a new card for its market expansion, but competing in the market where leading enterprises have already developed a substantial presence is undoubtedly a tough battle.