China Property Management Services 1H24 Core Business Res...-110286725

M IdeaChina Property Management & Services | Asia Pacific1H24 Core Business Resilient; Capital Return Protected DownsideMorgan Stanley Asia Limited+Cara ZhuEquity Analyst Cara.Zhu@morganstanley.com +852 2848-7117 Stephen Cheung, CFAEquity Analyst Stephen.Cheung@morganstanley.com +852 3963-0385 Patrick JiangEquity Analyst Patrick.Jiang@morganstanley.com +852 3963-2567 China Property Management & ServicesAsia PacificIndustry ViewAttractiveExhibit 1 : Price Target and Rating ChangesCompany nameTickerNewOldNewOld Chg(%)A-Living3319 HKUWUW1.85 1.95 -5%CGS6098 HKUWUW3.22 3.81 -15%CR Mixc1209 HKOWOW33.23 41.49 -20%Onewo2602 HKEWEW19.39 21.23 -9%Poly Property Services6049 HKOWOW32.41 44.07 -26%Sunac Services1516 HKEWEW1.53 1.75 -12%Greentown Management9979 HKEWOW3.18 7.58 -58%CWTC600007 SSOWUW25.91 27.15 -5%Median-14%Average-19%RatingPT (LoC) Note: Closing prices as of September 6, 2024 Source: Company data, Morgan Stanley Research estimates. Despite sluggish VAS growth amid weak macro, PMS core business held up well in 1H at mid-teens growth. With a lower base into 2H, we expect 7% earnings growth in 2024E with 6% dividend yield. Prefer CR Mixc, GTS and PPS. Weak 1H24 results but leading players showed resilient profit on enhanced operating efficiencies: Core profit +4% y-y on average (+17% y-y for SOEs, -18% y-y for POEs). Overall revenue growth slowed down on weaker VAS growth, but leading players' PMS business posted mid-teens growth with stable margin. Developer-related risks lingered incl. special impairments and increasing A/R from parent developers, DVAS earnings drags even for SOEs, and margin compression on projects with high vacancy rates. However, further downside likely manageable given lower non-recurring business earnings contribution and better corporate governance after 2 years of earnings reset. Cashflow and op. efficiencies key priorities in 2H: 1H OCF deteriorated with weaker cash collection from res. property owners. Non-res. projects were stable on selective project expansions and cutting low-profit projects. Better service quality and client portfolio optimization key to improving cashflow in 2H. With greater emphasis on op. efficiency amid weak macro, we prefer PMCs with early mover advantages in tech and strong cost control. Third-party competition heightened; prefer mall operators for strong cashflow and accelerating market consolidation: 1H third-party expansion -13% on rising competition and tighter budget for govt and corp clients. Given shrinking primary market, we expect PMCs with expertise in secondary and non-res markets to outperform. Within PMCs, we prefer shopping mall operators for: 1) stronger cashflow thanks to higher cash collection rate; and 2) market share gain for leading players amid market downturn, leveraging strong op. capabilities and brand equity to attract tenants (e.g. CR Mixc and CWTC). We expect 7% prof