Diverging performance; SOE outperformed
- 1H22 results for PM sector diverged with quality PMCs’ net profit up 24% while net profit of PMCs with troubled developer parents down 31% yoy.
- PMCs’ weak results were due to a sharp fall in VAS revenue from developers, higher provisions for receivables and fewer projects delivered.
- PMCs’ receivable days on average increased by 32% primarily due to Covid19 and the weak China economy in 1H22.
- Stay sector Overweight on long term growth potential. Our preferred SOEs are COPL and CR Mixc. We like CIFI ES and CGS among private PMCs.
Diverging 1H22 results: quality PMCs’ profit up 24% yoy on average
The 13 property management companies (PMC) we cover reported diverging 1H22 results – state-owned enterprises (SOEs) or PMCs with healthy developer parents such as CR Mixc, COPL, Poly PS, CIFI ES and CGS stood out with average net profit growth of 24% yoy. In contrast, profits of PMCs with troubled developer parents fell 31% yoy – dragged by sharp fall in GPM and slower revenue growth.
SOEs or quality PMCs significantly outperformed
SOEs such as CR Mixc, COPL and Poly PS and quality non-SEO PMCs like CGS and Ever Sunshine reported strong net profit of 28-36% yoy in 1H22, backed by 1) stable delivery of projects from developer parents, 2) relatively less impact from VAS revenues, and 3) smaller provisions for receivables. The only exception was Greentown Services, whose net profit fell 27% yoy, due to unexpected receivable provision and higher than expected SG&A.
Results for PMCs with troubled parents were hardest hit
Results for PMCs (e.g. Sunac Services, Shimao Services and Times Neighborhood) were substantially affected by their developer parents’ liquidity problems in 1H22 with net profit falling 74-224% yoy due to 1) less GFA delivery and VAS from developers, 2) a big jump in provisions for receivables from developers. We expect their revenue growth to be much slower given that their developer parents are more focused on managing balance sheets. This could lead to far less property sales and project deliveries, in our view. Meanwhile, these PMCs (e.g. KWG Living) could increase provisions for 2H22F significantly if their developer parents’ liquidity deteriorates.
Longer receivable days across the board
PMCs’ receivable days had lengthened across the board, increasing by 32% from 72 days at end-2021 to 95 days in 1H22 on average. This was due to Covid-19 cases in 1H22 and the weak China economy. Jinke and Times had the biggest increase in receivables and the longest receivable days among peers.
Top picks: COPL, CIFI ES, CGS
We reiterate our Overweight call on property management for its secular long-term growth potential and asset-light business model. In the shorter term, we prefer SOE PMCs such as COPL and CR Mixc. For non-SOEs, we like CIFI ES and CGS as we believe their developer parents liquidity is still manageable. Downside risks to our call include deterioration in property sales which could further hurt market sentiment.