COUNTRY GARDEN SERVICES(6098.HK)：RISKS GRADUALLY CLEARING UP CASH FLOW REMAINS DECENT-格隆汇

机构：中银国际
研究员：Gurney LIU/Maggie CAI

　　Country Garden Services’ (CGS) 2024 revenue grew by 3.2% YoY to RMB44.0bn, largely in line with our estimation. Core segments including property management, community VAS, and three supplies and property management recorded positive growth, leading to improved revenue structure. Gross margin narrowed by 1.4ppts to 19.1%, 0.6ppt below our estimation, partially due to the impact of change of accounting method in 2H23 as revenue from high risk customers are no longer recognised on an accrual basis. SG&A expenses as % of revenue increased by 1.1ppts, partially due to impact from share-based compensation. Impairment of goodwill amounted to RMB990m (2023: RMB1.48bn), while that on receivables amounted to RMB664m (2023: RMB2.59bn). Reported net profit at RMB1.81bn was 11.3% below our estimation. Core net profit excluding impact from share-option and amortisation of M&A related intangible assets declined by 22.9% YoY to RMB3.03bn, 7.3% higher than our estimation. Including special dividend, payout ratio on core net profit is 32.6%. We lifted our 2025E core EPS by 10.4% given reduced risk of impairments, and raised our TP by 28.9% to HK$7.44. Considering reduced risk and cheap valuation, we maintain BUY rating on the stock.
　　Key Factors for Rating
　　New GFA under management obtained in 2024 amounted to 82m sqm (2m from three-supply and property management segment), adding total GFA under management to 1,127m sqm. Third party projects accounted for 51.2% of total GFA under management at end-2024, up 1ppt from 2023.
　　Operating cash flow amounted to RMB3.87bn, equal to 1.3x of core net profit. Receivable situation has improved significantly since CGS reduced exposure to risky customers, stopped recognising revenue from risky customers on an accrual basis, and provided sufficient impairment on receivables from risky customers. Trade receivables from risky customers before impairment further reduced by RMB449m in 2024, and now only accounts for 3.7% of the RMB17.7bn trade receivables after impairment.
　　Community VAS revenue grew by 11.8% YoY, beating our estimation by 8.3%. Gross margin for community VAS declined by 0.8ppt to 38.6%. Revenue contribution from community VAS increased by 0.7ppt.
　　Key Risks for Rating
　　Market may continue to worry about the impact from a related party.
　　Valuation
　　We lifted our target 2025E core P/E from 6x to 7x, given reduced impairment risk for receivables, improved revenue structure, and more visible cash flow. The stock currently trades at 6.2x 2025E P/E and offers 5.3% 2025E yield, which we think is undemanding given high-single-digit earnings growth expected for 2025, and solid cash flow.