中信证券:物业行业稳中求进 龙头持续成长

CITIC Securities: Steady progress in the property industry, leading the way and continuing to grow

Zhitong Finance ·  Dec 25, 2023 20:20

Changes and immutability of the industry

The Zhitong Finance app learned that CITIC Securities released a research report saying that the property industry's stock market is basically stable, the pressure on the cost side is low, and the transparency of performance is high. If enterprises can control repayment risks in the process of growth and expansion, then it is entirely possible for enterprises to achieve a steady increase in performance. If enterprises invest appropriately to optimize infrastructure and workers' working interfaces, then it is entirely possible for enterprises to achieve faster growth without relying entirely on faster, capital-driven growth. The real estate industry cycle may indeed pose risks to the industry, but as long as it is handled properly, property service companies may be largely unaffected by the real estate development cycle. Optimistic about leading companies in the industry.

▍ The main views of CITIC Securities are as follows:

In the era of de-commercialization, the importance of new market reserve contracts has declined markedly.

Historically, reserve area (pre-sale property management contracts for new homes that have not been contracted for pre-sale services) is an important indicator for measuring a company's growth potential. These contracts have a high degree of security, great pricing potential, strong customer willingness to pay, and low upfront investment.

Looking at it now, the importance of new market expansion in housing development may have declined markedly. First, the scale of development is declining. It is estimated that the new housing construction area in the country in 2023 will drop 56% from the highest point in 2019, and may continue to decline in 2024; second, the current share of existing housing sales has increased, and the risk of vacant costs after delivery of new homes has increased markedly; third, due to the economic cycle, the difficulty of collecting property fees for small owners in some regions, especially those that have not stayed, has increased; finally, in the context of guaranteed delivery, insufficient investment by development enterprises affects the quality of housing, making it more difficult for property service enterprises to operate.

Overall, the importance of residential inventory expansion and non-residential expansion has increased markedly, while the importance of new residential development within the industry has declined.

The importance of the size of accounts receivable in the operation and management of enterprises has increased dramatically.

The size of property service companies' receivables is increasingly becoming a key indicator for judging service satisfaction and operational management capabilities. According to various companies' announcements, in mid-2023, the current share of trade receivables of the seven leading enterprises with the largest market capitalization reached 15%, an increase of 6 percentage points over the 2022 interim report, and the turnover of trade receivables was 81 days, an increase of 12 days over last year's interim report. (The industry has seasonal characteristics, and the asset structure and cash flow at the time of the interim report cannot be compared with the annual report). On the one hand, the pressure on business categories such as urban services continues to increase. On the other hand, the residential property management sector, which has traditionally seen little pressure on receivables, is also facing rising difficulties in structural collection, but differentiation among enterprises is increasing.

The actual payment ratio of property fees payable in that year better reflects the company's capabilities than net cash inflows. Settlement of arrears and advance collection are certainly important, but not as important as actual payment due. Furthermore, the way in which the industry's operating income is recognized also makes the accounts receivable of different enterprises not completely comparable, and investors need to clarify the differences in the best collection rate assumptions of different enterprises.

Related transactions have been questioned, and shareholder structure and corporate governance have become the key.

The independence of the industry, especially the rationality of related transactions, has been widely questioned. At this stage, the industry cannot be completely decoupled from real estate, and new delivery contracts and services for real estate companies cannot be completely reduced to zero. Under the premise that it is difficult for investors to determine the rationality of related transactions, shareholder structure and corporate governance mechanism are key indicators for determining a company's valuation.

Specifically, companies owned by management have governance advantages, and companies that introduce checks and balances from important shareholders have advantages. Judging from the results, companies that value the voices of tradable shareholders will also be more proactive in terms of dividends and repurchases.

The constant characteristics of the industry: stable stock contracts and steady improvement in efficiency.

The property service industry is one of the areas least affected by the development cycle in the entire real estate industry chain. There are no stock service contracts with run-in issues. The basic business market is highly stable, and prices and collection rates rarely fluctuate significantly. Furthermore, at present, the working interface of workers in the property service industry is clearly likely to be optimized, and there is also a trend of accelerating application of various new technological achievements. Considering the development of value-added services, it is expected that there is still room for a steady increase in the industry's gross margin.

Overall, the property service industry is a Chaoyang industry with a relatively low correlation with the economic cycle and a highly stable basic market.

Risk warning:

Capital alone cannot stimulate the industry. Too rapid mergers and acquisitions may bring about the risk of impairment of goodwill, and impairment problems may continue to occur; some public construction and urban service projects are difficult to repay, and there is a risk that gains will outweigh losses from the perspective of cash flow; there is a risk that industry expansion and competition will continue to intensify, and there is a risk that the operation and management of some enterprises will be irregular.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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