Greentown Service Group Margins Disappoint for 2022,

No-moat Greentown Service Group’s 02869 2022 revenue and net profit had been well guided following its prior profit warning, but the market may still be disappointed by potentially lower profit margins. While GSG achieved 18% year-on-year top-line growth for 2022 thanks to the resiliency of property management income, it saw pronounced margin contraction under transitory receivable impairment and pandemic-related cost. Looking forward, we expect GSG’s profitability to recover gradually, but the subdued operating efficiency of its property management and community value-added services, or VAS, remain a negative. In addition, we think GSG’s growth outlook will be weighed down by competition. As such, we trim our fair value estimate to HKD 6.50 from HKD 10.50 as we assume lower revenue growth and margins through the next decade. However, we view the long-term risk/reward balance of GSG as appealing for investors, with around 35% upside to its current valuation.

GSG’s property management services segment posted a strong 21.6% year-on-year revenue growth in 2022, which we mainly attribute to the 26% increase in gross floor area under management. Management shared that the company leveraged its robust brand premium to endogenously expand its GFA under management in Yangtze River Delta cities. That said, we are wary of the slower addition in reserved GFA of just 9% year on year, which will likely pressure management fee growth over time. Despite decent top-line growth, segment gross margin contracted by 40 basis points in 2022 due to the severe pandemic impact. While we expect property management services to see better cost leverage given the removal of COVID-19 measures, the pickup in the next few years will likely be tempered by competition on pricing and rising regional labor cost, in our view. This segment, nonetheless, should continue to lead GSG’s earnings growth and we anticipate gross profit contribution to rise to over 51% in 2025 from 47% in 2022.