The real estate shift cycle. The property management industry, which is highly related to real estate, has also faced real difficulties such as slowing scale growth and increasing profit pressure in recent years.

The most intuitive example of this is, of course, the performance report of a listed property company. Looking through the 2023 report cards of key companies, the performance pressure on property companies with credit risk from some related parties is still high; while some related parties operate steadily, or property companies with relatively small real estate-related businesses, their performance shows strong development resilience.

According to the Zhitong Finance App, the performance of Hong Kong stock property companies in 2023 was further divided. Among key property companies, C&D Property (02156)'s revenue and net profit growth rates reached 55.8% and 89% respectively last year. Additionally, Wanwuyun (02602), Poly Property (06049), and CNOOC Properties (02669) all achieved double-digit profit growth; at the same time, in a period of industry adjustment, the scale of some property companies continued to shrink, and profit pressure was not fully released. For companies like this, the “darkness before dawn” seems to have lasted longer than expected...

The segmentation of the industry adjustment period is still the key word

Going back to the historical process of the development of China's property industry, property companies that have grown rapidly can be said to be a companion product of the booming real estate industry in the past 20 years. However, it is called the same source of profit and loss. Since almost all leading companies have a strongly related real estate developer, this means that when the real estate industry enters an adjustment period, property companies that are inextricably linked to real estate parties will also be affected to a greater or lesser extent.

In the past few years, real estate developers have generally experienced sharp declines in sales data. According to Kerry data, the sales amounts of the top 100 real estate companies in 2022 and 2023 fell by 42% and 18%, respectively. Affected by this, the pace of expansion of the management scale of property companies continues to slow down. According to Ping An Securities research report, the overall management area of the 10 mainstream real estate companies rose to 2.72 billion square meters in 2023, an increase of 20.9% over the previous year, and a decrease of 8.5 percentage points from 2022.

Also, it is worth noting that the share of third parties and non-residential property companies in the management area of the sample property companies continues to increase, which indicates that relevant real estate companies are trying to reduce their dependence on related housing enterprises. According to the data, in 2023, the share of the area managed by a third party of nine mainstream real estate companies increased 1.6 percentage points to 61.1% year on year, and the share of non-residential management area increased 2.5 percentage points to 40.6% year on year.

The industry has entered an era of slow growth, and it makes sense that the performance of listed real estate companies is polarized. In 2023, central state-owned property enterprises with manageable risks associated with housing enterprises generally achieved steady and progressive performance. For example, Poly Property's revenue increased 10% to 15.1 billion yuan, net profit to mother increased by 24% to 1.38 billion yuan, and core financial data showed a steady growth trend. Other property companies, such as CNOOC Property, have also achieved double-digit growth in revenue and net profit to mother.

In contrast, some real estate enterprises with high operating pressure related parties have continued to face tests over the past year. Take Sunac Services (01516) as an example. The company's revenue in '23 was 7.01 billion yuan, down 1.6% year on year; net profit to mother was -440 million yuan. Although losses were reduced on a year-on-year basis, it is still mired in losses. Jinke Services (09666) also has similar problems. Last year, the company's revenue and net profit to mother were 4.98 billion yuan and -950 million yuan respectively. While revenue growth stagnated, it continued to face huge losses. However, although the revenue of real estate companies such as Ya Life Service (03319) and Yongsheng Service (01995) still showed a slight increase in revenue, net profit returned to mother decreased significantly during the same period.

Looking at the financial reports of various property companies, another prominent characteristic of the property industry in 2023 is that the industry is returning to the essence of cash flow business. One example is that property companies' operating cash flow generally improved in '23, reversing the year-to-year downward trend in 2021-2022. Also, judging from the net cash ratio index, there are also more and more property companies that have achieved more than 1 times the coverage.

Is business shifting to value awaiting revaluation?

In the past real estate upward cycle, the rapid development trend of developers and blooming everywhere “infected” many property companies, and the iron law “scale is justice” was also applied in the property industry. However, time has changed, and with the deep adjustments in the real estate industry in recent years, various property companies have also begun to think about ways out in the post-real estate era.

Judging from the trends of leading companies, the wave of mergers and acquisitions of real estate companies has shown signs of abating in recent years, while corresponding property companies are focusing more on expanding to third parties. Take Poly Property, a leading player in the industry, as an example. In 2023, the company's contract amount for newly expanded third-party projects reached 2.97 billion yuan; by the end of the year, Poly Property's contract management area from third-party projects was about 580 million square meters, an increase of about 122 million square meters over the same period last year, accounting for 62.9% of the total contract management area.

At the same time, on the basis of traditional “four guarantees” services (i.e. security, cleaning, green protection, and warranty), property companies have also begun to explore various value-added services to inject new growth momentum into themselves. According to information, value-added services for property companies have evolved from early community leasing and shopping assistance to today's community life services (community retail, domestic service, community pension, etc.), asset management services (housing brokerage, parking services, Mercure services, etc.), community space operation services, and other derivative services.

While various management levels are showing ingenuity, another phenomenon worthy of investors' attention is that many property companies have increased their dividend rates in 2023. According to a research report by Dongwu Securities, most of the sample companies selected by the agency increased their dividend rates significantly in '23. Many of them had dividend rates of more than 6%, which clearly met the characteristics of high dividend targets.

At the current point in time, after experiencing major fluctuations in the capital market, investors' preferences have begun to lean towards sectors with high win rates. Since this year, the market style has clearly changed to favor dividend assets. And as leading property companies consciously increase their dividend rates, high dividend characteristics may help high-quality real estate companies attract the attention of more investors.

All in all, high-quality property companies that have returned to the cash cow logic at this stage may be able to re-win the favor of fundamental investors through steady operation and high dividends; for investors with higher risk appetite, those property companies that continue to make progress in expanding and cultivating value-added businesses by third parties may also have a high value of attention. As stock prices gradually absorb pessimistic expectations, the future of real estate companies may no longer need to be too pessimistic.