Solid growth with manageable collection risk
- Poly Property Services’ (Poly PS) core net profit increased 28% yoy in 1H22; overall gross profit margin (GPM) edged up 0.2% pt yoy to 20.2%.
- Its GPM from community VAS continued to recover, as its initial investments in new VAS bear fruit.
- We estimate its trade receivables days (c.60) were one of the best in the industry. Upgrade from Hold to Add with a higher TP of HK$50.70.
1H22 core net profit 16% higher than our estimate
Poly PS’s core net profit for 1H22 increased 28% yoy to Rmb620m, 16% higher than our forecast. Overall GPM edged up 0.2% pt yoy to 20.2%, 1.9% pts higher than our estimate; all of its three business segments reported yoy improvement in GPM, as initial efforts to manage costs bear fruit.
Stable growth in management portfolio
Its managed GFA grew 58m sq m in 1H22 and it secured 17.7m sq m of new contracted GFA from its parent Poly Developments (2.6m sq m more than in 1H21), indicating parent’s relative strength among property developers. On third-party (3P) bidding, nonresidential projects formed 86.2% (in terms of annualised contract value) of its newly acquired contracts. Non-residential GFA formed 56% of its total managed GFA as of endJun 22, thanks to solid growth in its public facility portfolio (revenue +42% yoy in 1H22).
Sustainable revenue growth in community VAS, with stable margin
Its GPM from community value-added services (VAS) improved 1.5% pts yoy to 31.9% in 1H22, on the back of efficiency improvement in move-in and furnishing as well as community convenience services. We project no less than 30% GPM for community VAS in FY22-24F, as its investments in new VAS in FY20 have laid the groundwork for sustainable revenue growth with stable costs.
Cash collection risk manageable
Its gross trade receivables rose 59% hoh to Rmb2.4bn at end-Jun 22. Management says that certain receivables from public facilities will be collected in 3Q22F and that c.72% of trade receivables have credit terms of no longer than 90 days. Based on our estimates, its average days of trade receivables were at c.60 in 1H22, one of the best in the industry. On the other hand, it deposited Rmb3bn cash to its parent in 1H22 for car parking (CP) space sales agency business; though we do not like this arrangement, we believe this will not impact Poly PS’s liquidity as 1) cash will be gradually released as CP spaces are sold; and 2) Poly PS still had sufficient cash of Rmb5.2bn at end-Jun 22.
Upgrade to Add with a higher TP of HK$50.70
We raise our FY22-24F EPS by 3-5% after lifting our GPM assumptions (new FY21-24F EPS CAGR: 25%), and increase our TP for Poly PS to HK$50.70 (22.1x FY22F P/E, 0.9x PEG). We upgrade Poly PS to Add from Hold, as we believe it is one of the companies gaining market share in the property management industry. Key risks include an increase in impairment provisions and lengthening of its cash conversion cycle, while faster-than-expected expansion in community VAS is a re-rating catalyst.