Weak outlook due to parent issue
- 1H22 results were weak with core profit 90% lower yoy at Rmb58m, dragged down by Rmb380m impairment losses and a 7%-pt margin contraction.
- We see more impairment losses dragging down earnings in FY22-23F, given that the liquidity issue of its parent is unlikely to be solved in the near term.
- It has to rely on 3P expansion as the GFA deliveries from its parent have slowed down; we expect its GPM would be under pressure in FY22-24F.
- We cut our TP to HK$1.57, now based on 5x FY23F P/E, due to higher impairment losses and loss of parental support. Downgrade to Reduce.
Disappointing 1H22 results with core profit dropping 90% yoy
Shimao Services reported disappointing results with core profit dropping 90% yoy to Rmb58m, primarily dragged down by impairment losses of Rmb380m from its related parties. Its gross profit margin (GPM) dropped 7% pts yoy to 26% due to the 8% pts and 4% pts of margin decline for its community value-added services (VAS) and property management services (PMS) respectively.
More provisions to be made this year
Shimao Services made Rmb380m impairment provisions in 1H22, representing c.21% of its total gross trade and other receivables (Rmb1,804m) from parent Shimao Group (813 HK, Hold, CP:HK$4.42) as at end-Jun 22. As Shimao Group’s liquidity issue is unlikely to be resolved in the near term, we expect higher provisions for it and third party (3P), at Rmb833m in FY22F and Rmb417m in FY23F, dragging down its EPS growth in FY22-23F.
To rely on 3P expansion in the future; margin under pressure
Shimao Services’ managed gross floor area (GFA) only expanded 15m sq m in 1H22, of which 2m sq m came from Shimao Group. Due to the latter’s weakening brand and financial distress, we expect the inflow of managed GFA from Shimao Group as well as 3P to slow down in FY22-24F. We also expect the revenue from VAS to non-property owners to decline substantially in FY22-24F as contracted sales from the Shimao Group had dropped 71% yoy in 9M22 and are unlikely to recover in the short term. As such, we estimate its GPM will drop from 29% in FY21 to 23-24% in FY22-24F, on the back of 1) more 3P projects in its managed portfolio, and 2) less revenue recognised for the VAS to non-property owners which carry higher margins.
Downgraded to Reduce with TP cut by 63% to HK$1.57
We cut our FY22F/23F/24F EPS by 69%/52%/51% as we now assume 1) higher impairment losses, 2) slower managed GFA growth, 3) slower growth for its revenue from VAS to non-property owners, and 4) margin contraction. We changed our valuation methodology for Shimao Services from PEG-based to P/E-based as sustainable EPS growth is no longer applicable. We cut our TP to HK$1.57, now based on 5x FY23F target P/E (previously 7.4x) with reference to other property management companies with financially distressed parents. We downgraded it to Reduce. De-rating catalysts included higher-than-expected impairment losses and manipulation of cash by parent. Recovery of property market is a key upside risk.