The Zhitong Finance App learned that Dongwu Securities released a research report saying that with 2024H1, gross margins of some property companies have stabilized or even rebounded, and the total amount of accounts receivable and number of working days in the medium term have risen slightly, but have not seriously deteriorated; in addition, the trend of property companies increasing shareholder returns through active dividends is continuing. At present, property companies with investment value should meet the following conditions: comprehensive gross margin, especially the gross margin of basic property service businesses, has shown a steady recovery for 2 consecutive accounting periods or more. The number of receivables turnover days is properly controlled. Among them, the growth rate of accounts receivable over a year is slow and the proportion is low, and related parties still maintain stable payment capacity and willingness. Have the ability to consistently pay high dividends; have a positive desire to pay dividends.

The main views of Dongwu Securities are as follows:

What kind of companies can achieve a steady recovery in profit margins?

There have been positive changes in the industry: the gross margins of some outstanding companies have stabilized or even rebounded. Taking the 14 sample companies as an example, the comprehensive gross margin caliber of 6 companies showed a recovery in 2024H1 compared to the same period in 2023. What is more important is the gross profit margin of the basic property service business. There are only 3 companies whose gross margin increased year-on-year for 2 consecutive reporting periods: CNOOC Property, Greentown Services, and Wanwuyun. Looking at the gross margin of various businesses, the profit margin level of CNOOC Property and Greentown Services has stabilized, leading most companies in the industry.

The reasons why gross margins of some companies took the lead in stabilizing are summarized as follows: achieving scale effects through a focused strategy of project layout, improving per capita management efficiency and reducing costs; implementing a “quality outreach” strategy to achieve positive contributions to profit margins; real estate stakeholders still maintain normal sales and delivery, which can provide stable delivery of high-profit margin projects; and firmly withdraw from projects with poor profitability or even loss. Finally, we need to pay attention to changes in management rates. Only when gross margins rise steadily and management rates are slowly reduced can the company be considered to have improved quality and efficiency.

Do receivables pose a significant risk to the property industry?

The sample companies' total accounts receivable and turnaround days in mid-2024 both increased slightly, but there was no significant deterioration. The analysis of accounts receivable is summarized as follows: There is no need to worry about excessive increases in the amount of accounts receivable in mid-2024. Focus on accounts receivable that are over a year old. Companies with a slow growth rate and low share of accounts receivable for more than a year also have lower operating risks. Classification of accounts receivable by object: The number of turnaround days is more important, reflecting the customer's actual willingness to pay and ability to pay. Currently, with the exception of parties related to central state-owned enterprises, which are still willing to pay, the ability and willingness of customers from all other parties (insured housing enterprise related parties, C-side small owners, B-side, and G-side) customers have all declined. Classification by enterprise nature: Central state-owned enterprises are far better than non-central state-owned enterprises in terms of whether they have receivables turnover days or more than one year of receivables control.

What is the maximum dividend rate agreed by the property company and the rate of increase?

The trend of property companies increasing shareholder returns through active dividends continues. As many as 7 of the 14 sample companies announced interim dividends, and 3 companies, China Resources Vientiane Life, Wanwuyun, and Yongsheng Service, paid special dividends. In addition, some companies also boosted shareholders' rights by repurchasing shares. In addition to the desire to pay dividends, the ability to continue to pay dividends is also important. The ability to continuously distribute dividends stems from the ability to generate cash flow. It can be measured using the net present ratio (net operating cash flow/core net profit) index. The net present ratio should remain at least 1 times in most years. Currently, it seems that Greentown Services, Binjiang Services, and central state-owned enterprises meet the requirements.

Finally, the increase in dividend rates is a function of medium- to long-term performance growth. Investors in value investing pay the most attention to “dividends per share”. Dividend per share = total dividend ÷ number of common shares = net profit to mother × dividend rate ÷ number of common shares. Due to the slowdown in future net profit growth, in order to maintain steady growth in “dividend per share”, they need to be hedged by increasing dividend rates. If complete hedging is not possible, repurchases and cancellations can be used to reduce the number of common shares. More importantly, the company needs to convince the market of its determination to maintain a steady increase in “dividend per share.”

Investment advice

Property companies with investment value at the present time should meet the following conditions: The overall gross margin, especially the gross margin of the basic property service business, showed a steady recovery for 2 consecutive accounting periods or more. The number of receivables turnover days is properly controlled. Among them, the growth rate of accounts receivable over a year is slow and the proportion is low, and related parties still maintain stable payment capacity and willingness. Have the ability to consistently pay high dividends; have a positive desire to pay dividends. According to the above requirements, central state-owned enterprises and real estate enterprises are relatively more in line with, but there are also some excellent non-central state-owned enterprises with quite good investment value.

Recommended targets: Poly Property (06049), China Resources Vientiane Life (01209), Greentown Services (02869), and Yuexiu Services (06626). It is recommended to focus on CNOOC Properties (02669) and Binjiang Services (03316).

Risk warning: Major shareholders/related parties delivered projects less than expected; recovery in real estate sales fell short of expectations; total social demand recovered slowly; scale of expansion fell short of expectations; risk of capital occupation by major shareholders of related parties.