Central China New Life’s 2022 Results Disappoint

No-moat Central China New Life 09983 posted weak numbers for 2022, with a year-over-year decline of around 12.5% for both revenue and net profit. Given that muted top-line growth was mainly due to the resurgence of COVID-19 and the real estate market downturn, we do foresee a mild rebound starting in 2023. Also, CCNL relies less on its sister developer Central China Real Estate for expansion in managed gross floor area and we expect this trend to persist. Despite the slide in earnings, CCNL has maintained steady margins thanks to disciplined operating spending. That said, we project margins to modestly decline through the next decade under emerging pressure from peers and increasing labor cost, and we lower our fair value estimate to HKD 7.50 from HKD 10.10. Shares are still underpriced as we think the market underappreciates CCNL’s growth in managed GFA, and the high dividend payout of 80% puts the dividend yield at an attractive 15%.

Despite the overall revenue decrease, CCNL’s 2022 property management revenue grew around 30% year on year, outperforming its other segments, driven mainly by an increase in managed GFA. Positively, the GFA growth was fueled by projects from third-party developers, which we think reflects CCNL’s rising traction to midlevel income residents given its strong Jianye brand in Henan province. In 2022, GFA contributed by third parties accounted for over 50% of total managed GFA, and we expect this mix to further tick up to 60% over the next 10 years. However, our assumption on pricing remains prudent, as we view that CCNL will not substantially raise management fee given low consumer income in Henan and intensifying competition.