CICC: Maintains "Outperform" rating on ES SERVICES (01995), with a target price of 2.5 Hong Kong dollars.

CICC released a research report stating that it maintains its profit forecast for ES SERVICES (01995) in 2025 (expecting a net profit attributable to the parent company of 500 million yuan, a year-on-year growth of 5%), and introduces a forecast for the net profit attributable to the parent company in 2026 (expecting a net profit of 520 million yuan in 2026, a year-on-year growth of 5%). The rating of outperform in the industry and a target price of 2.5 Hong Kong dollars are maintained, corresponding to a 2025 target price-earnings ratio of 8 times, implying a 30% upside potential. The company is currently trading at a price-earnings ratio of 6 times for 2025. Key points from CICC: Performance in 2024 meets market expectations The company announced its financial performance in 2024: revenue increased by 5% year-on-year to 6.84 billion yuan, and net profit attributable to the parent company increased by 10% year-on-year to 480 million yuan, in line with market expectations. The board of directors recommended a year-end dividend of 0.07 Hong Kong dollars per share (total of 0.18 Hong Kong dollars for the year), with a dividend payout ratio of 62%. The dividend yield at the closing price on April 1 corresponds to 3.5% (total annual dividend corresponds to a dividend yield of 9.4%). Strong performance in market expansion, while value-added services are under pressure. By the end of 2024, the company's managed area increased by a net of 29.23 million square meters to 251 million square meters compared to the end of 2023, a year-on-year increase of 15%, with a total of 29.61 million square meters of projects exited during the year. The amount of third-party expansions corresponds to an annual contract amount of approximately 1.58 billion yuan (corresponding to a contract area of over 83 million square meters), a sharp increase of 36% year-on-year. The company continues to focus on strategically expanding in core areas and the annual contract amount for expansion in 10 regional companies exceeded one billion yuan. However, the scale of value-added service income has shrunk due to market conditions, with non-owner value-added services and community value-added services income decreasing by 23% and 3% year-on-year to 600 million yuan and 860 million yuan respectively in 2024. Operational efficiency steadily improved, and accounts receivable and cash flow performance relatively good. In 2024, the company continued to optimize its project portfolio and clear some inefficient businesses, with both the core business gross profit margin improving year-on-year; the basic property gross profit margin increased by 0.5 percentage points year-on-year to 19.3%, and the community value-added service gross profit margin increased by 3.4 percentage points year-on-year to 34.7%. The annual sales and management expense ratio decreased by 1.1 percentage points year-on-year to 7.6%, mainly benefiting from continuous optimization of management efficiency. The balance of accounts receivable at the end of 2024 increased by 340 million yuan compared to the end of 2023 to 2.79 billion yuan, with the balance of receivables from related parties slightly decreasing. The comprehensive collection rate calculated by the bank fell by 1.3 percentage points year-on-year compared to last year; the net operating cash flow for the year was 680 million yuan, with a coverage ratio of 1.4 times the net profit attributable to the parent company, showing some resilience overall. Expected to steadily advance the "25 Plan" The company stated that it will continue to steadfastly execute its established strategic plan, with the basic property management sector continuing to deepen its presence in cities, formats, customers, and projects, aiming to maintain its position in the top 10 of the industry in the future, and achieve high-quality development with a net profit coverage of around 1 times the operational net cash flow. The bank expects that as the company continues to solidify its capabilities in its external expansion, the future business scale is expected to continue to expand steadily; considering its relatively good cash flow performance and the cash balance on hand, the bank believes that dividend distributions still have a solid foundation (the management team's performance guidance indicates that the dividend payout ratio for the next two years will not be less than 50%); in addition, the bank also recommends that investors pay attention to the company's subsequent buybacks and other shareholder return actions. Risk warning: Risks of underperforming development of value-added services and risks of accounts receivable collection and impairment exceeding expectations.