For some time now, I have been highly optimistic about Greentown Management Holdings (09979). Being able to continue to see this construction giant achieve stable returns, which is very rewarding.

In terms of performance, in 2023, Greentown Management Holdings's continuous operating revenue reached 3.302 billion yuan, up 24.3% year on year; gross profit reached 1,722 billion yuan, up 24% year on year; comprehensive gross margin for the period reached 52.2%, which is basically the same as 52.3% in the same period last year; and net profit attributable to the company's shareholders reached 974 million yuan, an increase of 30.8% year on year.

Net profit is higher than the increase in revenue, a phenomenon unique to Greentown Management Holdings, and it is also the ultimate result of its cost control and efficiency improvement. In the period from 2021 to 2023 after listing, Greentown Management Holdings' net profit remained higher than the increase in revenue, and the highest difference between the two was nearly 15 percentage points.

The increase in revenue and profit enabled Greentown Management Holdings to continue its consistent high dividend strategy. The board of directors announced a final dividend of 0.4 yuan per share and a special dividend of 0.1 yuan per share, totaling RMB 1,005 billion.

Since its listing, Greentown Management has been very generous in dividends. In 2020, the company paid out 0.17 yuan per share, with a dividend rate of 65%; in 2021, 0.2 yuan per share was paid, with a dividend rate of nearly 70%; the company's dividend ratio in 2022/23 was over 100%.

Greentown Management Holdings was listed on the Hong Kong Stock Exchange on July 10, 2020. At that time, the issue price was HK$2.5. However, for a year and a half after listing, its stock price has been hovering within the IPO issuance price center. However, if you buy it at that time, it means that the dividend alone can cover around 60% of the cost.

Furthermore, as of the close of trading on March 25, the stock price of Greentown Management Holdings was fixed at HK$6.42. At this price, plus dividends, investors' earnings have basically tripled.

This high dividend comes from Greentown Management Holdings' continuous growth in cash flow over the years. According to its financial report, Greentown Management Holdings' net operating cash flow reached 955 million yuan in 2023. The company had no bank liabilities and sufficient cash flow.

In accounting accounts, profits can be falsified, performance can be falsified, but free cash flow cannot be falsified. Therefore, this is the core secret of Buffett's investment, concentrating capital on investing in companies with strong free cash flow.

The free cash flow situation of Greentown Management Holdings has been verified in the past four years of listing, and its annual operating cash flow is a net inflow.

Judging from the data, the net operating cash flow of 955 million yuan in 2023 is almost the same as the net profit of 974 million yuan to mother, indicating that Greentown Management Holdings has a high cash conversion rate — this is one of the asset-light characteristics of the company, and it also reflects the company's internal operating conditions.

In addition to the 2023 results, Greentown Management Holdings' net operating cash flow in the three years 2020-2022 was at the same level as net profit attributable to mother. For example, in 2022, the value reached 725 million yuan, and the corresponding net profit to mother was 745 million yuan. Having no debt and plenty of cash flow is another major killer for Greentown Management to maintain a strong development momentum.

In fact, the other aspect of investing is the pursuit of stable growth returns. Choosing an entity with plenty of net cash on the books means having a certain margin of safety while enjoying high continuous dividend income.

Because if the company chooses dividends, then sustainable and stable dividends are an important indicator for measuring the quality of the company, and this requires the company to have a prospect of continuous growth and annual increase in free cash flow. Dividends maintain basic continuity and stability, and will not change drastically from year to year. This is called the “smooth dividend” phenomenon in finance.

Supported by stable operating cash flow, Greentown Management Holdings's dividend payout ratio is expected to remain above 80%. The dividend payout ratio has exceeded 100% in the past two years, showing the company's high dividend appeal to shareholders.

Referring to the performance growth over the next 3 years, Greentown Management Holdings proposed these four guidelines at the performance meeting: “In the next 3 years, maintain a compound increase of at least 20% in operating income, maintain the company's net profit margin level above 25%, maintain a compound increase of 25% in net profit belonging to the parent company, and maintain a dividend ratio of not less than 80%.”

From an industry perspective, according to data from the National Bureau of Statistics, the scale of national real estate development investment fell 9.6% year on year in 2023, while the contract construction industry ushered in rapid expansion. Nearly 100 brand housing enterprises announced their entry, showing a countercyclical trend. It's the fundamentals of the industry.

According to CICC's analysis, Greentown management will benefit from the proxy construction needs brought about by state-owned enterprise city investments, financial institution projects, and “three major projects,” and there is strong certainty about future revenue and profit growth.

Although the stock price of Greentown Management Holdings has risen by more than 12% after the financial announcement, causing its dividend yield to 6.59%, in the long run, the dividends that will continue to increase in the future, if there is a dividend rate of around 9%, may cause investors holding Greentown Management Holdings to return costs to zero in about 8 years, and finally let profits run wild.

In summary, as we emphasized at the beginning, for a company with a very strong cash flow and a strong asset responsibility statement, we are optimistic that its net operating cash flow will continue to increase in the future, while total debt will decline. We are optimistic that Greentown Management Holdings will create strong cash flow and high dividends while bringing convincing upward potential to investors.