Greentown Service Group Margins Disappoint for 2022, FVE Reduced to HKD 6.50

No-moat Greentown Service Group's 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.