Soochow: the transformation, risks, and dividends of property management companies

Soochow released a research report stating that in the first half of 2024, the gross profit margin of some property companies showed a stabilizing or even rising trend. The total amount and turnover days of receivables slightly increased in the mid-term, but not to a level of serious deterioration. In addition, the trend of property companies increasing shareholder returns through active dividends is continuing. At the current point, property companies with investment value should meet the following conditions: the comprehensive gross profit margin, especially the gross profit margin of basic property services, should show a stabilizing or rising trend for more than 2 consecutive accounting periods. Receivables turnover days should be properly controlled, with slow growth and low proportion of receivables exceeding one year, and related parties maintaining stable payment ability and willingness. They should have the ability to sustain high dividends and a willingness to pay dividends. Soochow's main points are as follows: What kind of companies can achieve a stabilizing or rising profit margin? There is a positive change in the industry: some excellent companies have shown a stabilizing or even rising trend in gross profit margin. For example, out of 14 sample companies, 6 companies in the first half of 2024 saw an increase in their comprehensive gross profit margin compared to the same period in 2023. More importantly, only 3 companies, CHINA OVS PPT, GREENTOWN SER, and ONEWO, have seen a year-on-year increase in the gross profit margin of their basic property services for two consecutive reporting periods. Looking at the gross profit margin of various businesses, the profitability levels of CHINA OVS PPT and GREENTOWN SER have stabilized, outperforming most companies in the industry. The reasons for some companies stabilizing their profit margins first are summarized as follows: achieving economies of scale through a focused strategic layout, improving per capita management efficiency, and reducing costs; implementing a "quality-oriented external expansion" strategy, with external projects contributing positively to profit margins; real estate-related parties maintaining normal sales and delivery, providing a stable volume of high-margin projects for delivery; and firmly exiting projects with poor or even negative profitability. Finally, attention should be paid to changes in management fee rates. Only when the gross profit margin stabilizes and the management fee rate decreases slowly can it be considered that the company has achieved quality improvement and efficiency enhancement. Will receivables pose a significant risk to the property industry? In the mid-term of 2024, the total amount and turnover days of receivables for sample companies have slightly increased, but not to a level of serious deterioration. The analysis of receivables can be summarized as follows: there is no need to worry too much about the increase in the total amount of receivables in the mid-term of 2024. Focus on the situation of receivables exceeding one year. For companies with slow growth and a low proportion of receivables exceeding one year, their operating risks are lower. When classifying receivables by object, turnover days are more important, reflecting the actual payment willingness and ability of customers. Currently, apart from state-owned enterprise-related parties, whose payment ability and willingness are still acceptable, the payment ability and willingness of customers from other parties (distressed real estate-related parties, C-end small property owners, B-end, G-end) have declined to some extent. When categorizing by company nature, state-owned enterprise companies have much better control over both receivables turnover days and receivables exceeding one year than non-state-owned enterprise companies. What is the appropriate upper limit and speed of dividend growth for property companies? The trend of property companies increasing shareholder returns through active dividends is continuing. In the sample of 14 companies, as many as 7 companies announced mid-term dividends, with 3 companies CHINA RES MIXC, ONEWO, and ES SERVICES also issuing special dividends. In addition to dividends, some companies have increased shareholder equity through share buybacks. In addition to the willingness to pay dividends, the ability to sustain dividends is also important. The ability to sustain dividends comes from the ability to generate cash flow, which can be measured by the net cash ratio (operating cash flow/net profit attributable to parent company). The net cash ratio should be maintained above 1 in most years, and currently, GREENTOWN SER, BINJIANG SER, and state-owned enterprise companies meet the requirements. Lastly, the increase in the dividend rate is a function of the medium to long-term performance growth rate. Value investors pay the most attention to "earnings per share." Earnings per share = total dividends common shares outstanding = net profit attributable to parent company dividend rate common shares outstanding. As future net profit growth slows down, to maintain stable growth in earnings per share, an increase in the dividend rate is needed to offset this. If this is not sufficient, share buybacks can be used to reduce the number of common shares outstanding. Most importantly, companies need to make the market believe that they are committed to maintaining stable growth in earnings per share. Investment recommendation At the current point, property companies with investment value should meet the following conditions: the comprehensive gross profit margin, especially the gross profit margin of basic property services, should show a stabilizing or rising trend for more than 2 consecutive accounting periods. Receivables turnover days should be properly controlled, with slow growth and low proportion of receivables exceeding one year, and related parties should maintain stable payment ability and willingness. They should have the ability to sustain high dividends and a willingness to pay dividends. According to the above requirements, state-owned property companies are relatively more compliant at the moment, but there are also some outstanding non-state-owned companies that have quite good investment value. Recommended targets: POLY PPT SER(06049), CHINA RES MIXC(01209), GREENTOWN SER(02869), and YUEXIU SERVICES(06626), with suggestions to pay attention to CHINA OVS PPT(02669) and BINJIANG SER(03316). Risk warning: Major shareholders/related parties may deliver projects on a smaller scale than expected; real estate sales recovery may not meet expectations; slow recovery of overall social demand; external expansion may be smaller than expected; and risks related to major shareholders' use of funds.