CITIC SEC 2025 Real Estate Ten Major Prospects: Issues Resolved, Valuation Has Bottomed Out

CITIC SEC released a research report stating that in 2024, the property services industry will face challenges such as increasing uncertainty in delivery, increasing pressure on receivables, difficulties in expansion, and a decline in value-added services. Despite this, the sector is expected to achieve year-on-year growth in net profit and net cash flow in 2024. Services transactions with related parties have been stabilized, and it is expected that the collection rate from third parties will bottom out in 2025, with a significant increase in dividend payout willingness. It is predicted that the dividend yield of the sector will reach 6.0% in 2024, and the sector's valuation is at the 15th percentile over the past 3 years, indicating that the sector's valuation is at a historically low level in the long term. CITIC SEC's main points are as follows: Outlook One: The uncertainty of converting previous property service contracts has increased, with more unfinished projects and falling house prices being the main challenges. The importance of new property development is expected to continue to decline. The increase in the proportion of unfinished projects after completion leads to property service companies receiving a large amount of fees from developers after the delivery of new projects, thereby increasing the receivables risk for property service enterprises. The proportion of sample companies' developed products (existing housing) as a percentage of inventory is expected to reach 22% by mid-2024 (compared to 13% in the first half of 2022), and it is forecasted to continue to rise. Falling house prices also increase the difficulty of satisfying customers for property services and may lower the pricing of property fees for new houses. In addition, the slowdown in the progress of new property developments reduces the speed of conversion of reserve projects. Overall, the impact of new completed projects on revenue growth and profit contribution has decreased. Outlook Two: The non-residential business is approaching a cyclical trough, and companies are raising their expansion standards to ensure contract quality. In 2024, non-residential property services face a dual challenge of declining demand and slowing receipts, and expose the disadvantages of relatively unstable contracts and significant susceptibility to economic cycles. However, property service companies actively raise their standards to avoid a sharp deterioration in receivables, focusing on high-quality, single large non-residential property service contracts, balancing profitability and collection difficulty indicators. Outlook Three: The importance of expanding existing residential properties continues to rise, with few companies cultivating the ability to expand externally. With a decrease in the total volume of new property developments and an increase in risks, the cyclical nature of non-residential contracts is stronger than residential property contracts, making the expansion of existing residential properties increasingly important. However, only a few companies such as ONEWO and GREENTOWN SER have mastered the skills of expanding existing housing on a large scale, overcoming challenges such as aging facilities in high-rise buildings. The bank believes that in 2025, the proportion of external expansion through existing residential properties is expected to continue to increase, but the differentiation in company structures will become more apparent. Outlook Four: Companies continue to wage a war on debt collection, gradually resolving receivables risks from full exposure. In 2024, related party debts were brought under control, increasing the independence of enterprises. However, there has been a varying degree of decline in the collection rates from third parties, as the willingness or ability of residents, governments, and companies to make payments has decreased. In 2024, the bank expects that most property service companies will be able to achieve positive operating cash flow, but only a few companies will be able to achieve operating cash flow net inflows exceeding annual net profit. In 2025, the bank predicts that efforts to improve occupancy rates and customer satisfaction will become more meticulous, and companies' experience in debt collection and prepayments will become more rich, leading to a possible bottoming out and recovery in industry collection rates. Outlook Five: The era of large-scale withdrawal is coming to an end. In the past two years, many companies have engaged in large-scale withdrawals, primarily due to poor quality of some acquisition targets, slow delivery or low occupancy rates of new properties, and difficulty or losses in collecting existing projects. Exiting these projects, while having a negative impact on the scale of the company, has increased the profitability and cash flow quality of enterprises. The bank predicts that after two years of withdrawals, the current quality of contracts for companies has improved, and the issues left over from the peak of acquisitions are also nearing completion. Outlook Six: Property service companies ensure cost safety, with overall stable gross profit margins for basic services, while individual margins may fluctuate. Changes in the cost side of property service companies are slow variables and are difficult to significantly increase in a low-inflation environment, with limited increases in labor costs and continuous optimization of work interfaces through technological empowerment to improve work efficiency. Some companies actively achieve significant results by improving management efficiency, which may lead to an increase in gross profit margins. Companies that bear the residual issues from developer deliveries may see a decrease in the profit margins of basic services. Overall, the profitability of the industry's basic services is highly stable and does not decrease with the aging of properties. Outlook Seven: Value-added services are transitioning from a significant decline to a year of collaboration. Compared to basic property services, owner-value-added services are optional expenses and are more affected by economic cycles. Businesses based on community spaces, such as advertising and media, are continuing to decline due to economic cycles and inefficiencies in scale; while businesses based on user trust, such as retail, are also declining due to economic cycles and lack of core competencies. Selling unsold properties and parking spaces are also affected by the downturn in the real estate market. Non-owner value-added services are also affected by the downturn in development, as property service companies lack core competitive advantages in the development chain. The bank predicts that this business will continue to see shrinking revenues and profits. Overall, the profitability of property service companies' value-added services may experience negative growth in 2024. In 2025, the bank predicts that value-added service business units facing development pressures may undergo qualitative changes, including exploring cooperation among different property enterprises to seek economies of scale. Outlook Eight: Industrial mergers and acquisitions are still in a downturn, with companies pursuing individual, small-scale mergers and expansions. Top companies still have ample cash reserves, but historically, industry mergers and acquisitions have not yielded good integration results. M&A activity in 2025 may be more active than in 2024, but is expected to focus on small companies with clear assets that are easy to due diligence, similar to ONEWO's new merger with Zhongzhou Property. M&A market valuations have already fallen below the valuations of mainstream companies in the secondary market, making them attractive at the industry level. Outlook Nine: Companies are paying more attention to investor returns, highlighting the sector's dividend attributes. The bank's calculations show that the current dividend yield of key companies in the sector is 5.8%. Property services have stable contract pricing, steady positive operating cash flow, low capital expenditures, and other dividend sector commonalities. Overall, the report by CITIC SEC provides a comprehensive analysis of the challenges and opportunities facing the property services industry in the coming years, outlining potential strategies for companies to navigate through these challenges and continue to thrive in the market.Characteristics: The enterprise's revenue continues to grow with the increase in management area, and the growth of the enterprise does not rely on capital expenditure. Service contracts are long-lasting in the form of light assets.The dividend payment rate of the property service company is continuously increasing, and there is still room for steady growth. The average dividend payment rates of leading companies in the past three years were 35%, 40%, and 50% respectively, gradually increasing. Due to the continuous operating cash flow in the sector and the lack of capital expenditure needs, the bank expects that there is still room for sustainable improvement in the dividend payment rate. The bank predicts that the average dividend payout ratio for the sector will reach 57% in 2024, with the current stock price corresponding to a dividend yield of 6.0% in 2024. The sector is expected to continue its high dividend policy in 2025, with total dividends expected to increase further compared to 2024. Outlook Ten: Valuation of property service companies sees a long-term bottom. Whether it is bad debts due to real estate development companies or a downturn in collection rates due to economic cycles, 2025 may mark an important turning point. The stable revenue scale and profitability of property service companies may be more fully reflected. Moreover, the industry has bid farewell to the historical problems of heavy financing, multiple mergers and acquisitions, and light dividend payments before 2023, truly entering an era of sustained high dividends similar to cash cow industries. Currently, the bank's monitored valuation of property service companies is at an average of the 15th percentile of the past 3 years. The bank predicts that there will be a significant opportunity for valuation improvement in the sector around the announcement of the 2024 annual report, stimulated by high dividends. The bank recommends the property service industry. Risk factors: Risks of a downturn in the real estate industry exceeding expectations. Risks of dividends falling short of expectations. Risks of collection falling short of expectations. Risks of ineffective control of accounts receivable periods.