Parent’s health a drag on its valuation
? Shimao Services reported a 51% yoy increase in core net profit in FY21 and
intends to maintain a payout ratio of 30%.
? We expect slower 3P expansion due to the weak property market and for
community VAS to continue to drive revenue at the expense of GPM.
? The tripled FY21 impairment provisions had little impact on its liquidity, given
its high net cash position. Downgrade to Hold with a lower TP of HK$5.
Unaudited FY21 results: core net profit up 51% yoy
Shimao Services reported a 51% yoy increase in core net profit to Rmb1.0bn, 10% below
our estimate. Overall gross profit margin (GPM) declined by 2.1% pts to 29.3% in FY21
due to margin contraction in value-added services (VAS) and the introduction of city
services with a low GPM of 13.4%. FY21 DPS has yet to be declared pending the audit of
its financials, but management suggests maintaining a payout ratio of 30%. Our analysis
and forecasts assume no material discrepancies between the unaudited and audited
financials of Shimao Services.
We expect slower 3P bidding expansion
Managed GFA/contracted GFA increased by 65%/53% yoy to 241m sq m/308m sq m as
at end-FY21, driven by active third-party (3P) bidding expansion. As we expect: i) no
M&As in FY22F, and ii) a weaker brand for 3P bidding expansion due to parent Shimao
Group’s liquidity issues, we project only 14-18% p.a. growth in managed GFA in FY22-
24F. We also expect a mild decline in its property management (PM) business’ GPM
(FY21: 27.5%) as Shimao Services manages an increasing proportion of 3P GFA.
New services in community VAS to drive revenue with lower GPM
Revenue from community VAS grew 57% yoy in FY21 to Rmb2.5bn, driven by relatively
new businesses such as “new retail” and “campus VAS”. We expect these businesses to
continue to be the key drivers of revenue growth for FY22-24F though they may drag the
segment GPM down. Meanwhile, we expect a decline in FY22F revenue from VAS to
non-property owners due to Shimao Group’s weak contracted sales (-67% yoy in 3M22).
Increase in impairment provisions
Impairment provisions tripled in FY21 to Rmb211m (4% of FY21 revenue), reflecting
higher collection risks due to rapid expansion for Shimao Services, as well as its parent.
Nevertheless, it still had Rmb6.6bn of net cash as at end-FY21, suggesting that the
impairment should have little impact on its liquidity for now.
Downgrade to Hold with a lower TP of HK$5
We cut FY22F/23F EPS by 21%/21% to factor in lower GFA growth and lower GPM
assumptions, as well as higher impairment provisions for receivables. Our EPS CAGR for
FY21-24F is cut to 20%, with a lower target FY22F P/E of 8.2x. Hence, we cut TP for
Shimao Services to HK$5.0 and downgrade the stock from Add to Hold. Key downside
risks include aggravation of Shimao Group’s liquidity and further increase in impairment
provisions, while stronger VAS growth and 3P expansion are key upside risks.