FINANCIAL STREET PROPERTY(01502.HK)：STEADY BUSINESS EXPANSION; BUT MARGIN PRESSURE MAY CONTINUE DOWNGRADE TO "ACCUMULATE"-格隆汇

机构：国泰君安国际
研究员：Chunli Zhan

　　Downgrade to "Accumulate" with TP at HK$2.40. We believe the margin pressure on Financial Street Property (the "Company") will last for a longer time, which should dampen its profitability. We revise down the Company’s 2024F-2026F EPS by 10.1%/ 12.0%/ 13.4% to RMB0.346/ RMB0.380/ RMB0.420, respectively, which represents a CAGR of 7.0% during 2023-2026F. We revise down our TP to HK$2.40 by applying 6.5x 2024F PER, and downgrade our investment rating to "Accumulate".
　　Revenue growth maintained momentum, but profit dampened in 1H2024. In 1H2024, the Company achieved steady growth in its total revenue, reaching RMB813.7 mn, up by 14.2%. The revenue growth was mainly driven by the increase in GFA under management. In 1H2024, the revenue from its property management services recorded stronger growth of 18.7% YoY, reaching RMB632.0 mn. However, on the other side, we observed a squeezed gross profit margin and some cost rigidity, which dampened the Company's profit in 1H2024. The gross profit margin declined by 2.1 ppts YoY to 15.7% in 1H2024. The shareholders' net profit declined by 10.8% YoY to RMB63.5 mn. The Company declared no interim dividend, but guided the full-year dividend payout ratio should be stable at the 50% level.
　　Newly-acquired projects brought margin pressure. One main reason for the margin squeeze was that fierce market competition brought thinner profit. The Company reached steady growth in GFA under management, reaching 43.96 mn sq.m. by the end of 1H2024. Among the newly-acquired GFA under management in 1H2024, 91.5% came from third parties, which implied relatively lower fees due to fierce competition. In addition, most of the non-residential projects were single owners, such as governments or enterprises, who lowered their management fee budget this year, considering the relatively weaker macroeconomic. We expect the Company's margin pressure may continue for the next two years.
　　Net operating cash inflow in 1H2024. The Company recorded net cash inflow of RMB36.45 mn in 1H2024. We believe the improvement in cash collection should help the Company to maintain an abundant cash reserve in the future.
　　Catalysts: 1) More quality office projects acquired in the short term; 2) improvement in profitability; and 3) turnaround from the loss in its catering services. Downside risks: 1) Slower-than-expected growth in GFA under management; 2) weaker office demand; and 3) unexpected labor cost hikes.