Central China Management Earnings: Weak Housing Sales and Stiff Competition Cloud Growth Outlook

No-moat Central China Management 09982, or CCMGT, recorded underwhelming results for the first half of 2023 despite project delivery normalcy. Revenue rose by only 1.1% year on year, as a mild housing sale rebound and fee basis shift failed to meaningfully lift fee income. Moreover, net profit decline versus the same period last year given travel expense increase is disappointing to us. While management remains optimistic about the firm’s positioning, we are wary that soft housing demand and competition with large peers could weigh on top-line growth and margins. Hence, we cut our 2022-27 CAGR on revenue to 4.4% from 6.6%, and on operating profit to 0.5% from 4.8%, respectively. This lowers our fair value estimate for CCMGT to HKD 1.40 from HKD 1.65. That said, we think the market may be overly downbeat on CCMGT’s profitability, as its asset-light services should warrant a 55.5% operating margin in 2027. Also, the firm’s robust payout has translated to an over 20% dividend yield at the current share price.

Although CCMGT’s switching to incentive fees on sales value from base fees brings some short-run positives, we think faltering new home sales in Henan province, which mainly consists of lower-tier cities, could be the long-term overhang. As such, we expect the average price for CCMGT’s projects to drop through 2025, given discounts on inventory. In addition, CCMGT has underperformed peers such as Greentown Management on revenue growth, which we think is due to a lack of nationwide presence and lower pricing compared with wealthier regions. With more developers expanding their project management services scope, we think that CCMGT will likely see pressure on fee rates for new projects.