20180828-中国银河国际证券-绿城服务-02869.HK-Patience_Needed_for_Nurturing_New_Services.Downgrade_to_HOLD_6页_1mb

Greentown Service Group [2869.HK] Summary

Core Content

Greentown Service Group (2869.HK) reported a 30% YoY revenue growth in 1H18, with EPS and GFA under management also showing growth. However, the operating profit growth was only 20% YoY, which was below expectations. The company's investment in new businesses and technologies has led to lower gross profit margins (GPM) and higher selling, general, and administrative (SG&A) expenses. The firm emphasized its preference for quality over rapid growth and highlighted its commitment to maintaining service standards.

Despite the lower-than-expected profit growth, the core property services segment maintained strong momentum, with revenue growth of 31.8% and GPM improvement of 1.1ppt to 11.9%. The GFA under management grew by 28.3% YoY to 150.8m sqm, with management expecting annual growth of ~30% in GFA.

The community living services segment showed 45% revenue growth but lower GPM due to the segment's lower margins and the company's investments in new value-added services. The consulting services segment outperformed expectations with 24.5% YoY growth to RMB400m, indicating the company's ability to adapt and secure more business from both property owners and corporates.

Main Points

• Revenue Growth: 30% YoY in 1H18, with ~30% CAGR expected for EPS between 2017-2020E.
• GFA Growth: 28.3% YoY, with management targeting ~30% annual growth.
• Margin Pressure: GPM and net profit margins are expected to remain under pressure due to investments in new business and SG&A costs.
• EPS Forecast: Revised down by 5%/9%/15% for 18E/19E/20E, to RMB0.19/RMB0.25/RMB0.32.
• Target Price (TP): Revised to HK$6.47, based on 30x 2018E PER, due to lower EPS forecast and RMB depreciation.
• Investment Strategy: The company prefers organic growth over acquisitions to maintain service quality and avoid overvaluation.
• Valuation Concerns: Current valuation (2018E PER close to 30x) provides limited upside, prompting a downgrade to HOLD.

Key Financials

Key Financial Ratios

Risk and Outlook

• Key Risks: An uptick in the property market, better-than-expected cost control, and unexpected M&A could affect the outlook.
• Investment Recommendation: HOLD due to limited upside from current valuation. A better entry point is advised, such as HK$5.63 with 15% upside.
• Long-Term View: The company is still considered a long-term investment opportunity, but short-term caution is advised due to margin pressures and slower growth in the community living services segment.

Summary

Greentown Service Group continues to grow in its core property services segment, maintaining a 30% CAGR for EPS and a ~30% annual GFA growth. However, the company is facing margin pressure due to its investments in new services and technologies, leading to a downgrade to HOLD. The target price has been lowered to HK$6.47 due to lower EPS forecasts and RMB depreciation, while the current valuation is considered to provide limited upside. The firm's focus on quality growth and organic expansion is expected to drive long-term value, but short-term patience is required due to the time needed to nurture new business lines.