Central China New Life Earnings: Margin Decline and Write-Down Lead to Losses and a Valuation Cut

We cut our fair value estimate on Central China New Life 09983, or CCNL, to HKD 5.50 from HKD 7.50 after it posted margin contraction and net losses for the first half of 2023. Notably, CCNL’s gross margin declined by 370 basis points year on year, as revenue from value-added services, or VAS, to property and nonproperty owners was dampened by soft demand. While CCNL’s core property management revenue saw double-digit year-on-year growth as activities normalized, we believe housing sales weakness and mounting competition in Henan province continue to pressure margins. As such, we lower our gross margin estimate for 2023 to 26.6% from 32.5%. Also, CCNL wrote off CNY 640 million in receivables from property developers, and we expect impairment to reach CNY 1 billion for full-year 2023 amid sector-wide liquidity strains. We still view CCNL’s shares as underpriced, as expansion in managed floor area from third parties should restore its earnings growth over time. On a positive note, the dividend payout remains healthy, signaling a 10.9% dividend yield in 2023 at the current share price.

CCNL’s core property management services posted 16% top-line growth for the first half of 2023, mainly thanks to a robust increase in gross floor area under management. We believe the 26% year-on-year growth in GUM from third parties implies that CCNL has leveraged brand equity and service quality to successfully win new projects. That said, GUM growth from sister developer Central China Real Estate tapered off given lackluster housing sales and fewer projects completed. Fee rates remained stable for the first half, but we expect rising pressure from peers to gradually cap the pricing upside. In the future, management aims to further expand service scope and upgrade technological tools, which bode well for ramping up GUM from independent parties, in our view.