CITIC SEC: Macro grasp of the insurance industry cycle, micro selection of high-performance stocks with high certainty.

CITIC SEC issued a research report stating that the first key point is to gradually rationalize the pricing mechanism, promote the policy turning point for high-quality and reasonably priced services, and predict that the current situation of increasing difficulty in collection may be eased, encouraging companies that provide good services for good properties. The second point is the turning point of the quality of enterprise operations. The bank predicts that by 2025, the cyclical business (service developers) will contribute almost 0 to the sector's performance, reaching a peak in the provision for goodwill and account receivable impairment, predicting a sector performance growth rate of 9.7%, and a significant improvement in the sustainability of profits. The last point is that companies continue to increase cash dividends. The bank believes that the sector's dividend payout ratio may reach 70% in the mid-term (2027), with a dividend yield calculated based on the current market value of 9.6%. The bank predicts that the dividend payout ratio in 2025 will increase slightly compared to 2024, reaching 66%, and the average dividend yield in 2025 will be 7.6%. Overall, the bank is optimistic about the sector's continued dividend potential. CITIC SEC's main points are as follows: Keyword 1: Collection: The slowdown in CPI growth and partial price limits on previous property fees have affected the sector's revenue growth and increased the difficulty of collection. By the end of 2024, the trade receivables of the property service sector for more than one year reached 27.7 billion RMB, a significant increase of 38% compared to 2023, objectively indicating the difficulty of collection. However, in 2024, the trade receivables in the sector increased by 9.2%, significantly lower than the 17% growth in 2023. This partly indicates that positive results have been achieved in collection work under difficult conditions, and it also shows that the proportion of long-term overdue owners is still small, with the vast majority of owners accepting the pricing of property services and paying on time. At the same time, property service companies actively provision for bad debts, with a net addition of bad debts of 6 billion RMB, an increase of 1.6 billion RMB compared to 2023, to a certain extent solidifying the financial statements. Keyword 2: Cost reduction: Faced with a grim situation, property service companies have also begun to cut costs. Firstly, the sector's contract liabilities increased by 6% in 2024, totaling 19 billion RMB more than 2023, with companies taking various measures to pre-collect property fees. Secondly, the sector actively controlled the supply chain, with payables increasing by 2.2 billion RMB. With strict control over the payment rhythm of the supply chain and the support of pre-collecting property fees, the sector's annual operating funds decreased by only 2.5 billion RMB. The net cash inflow from operating activities in the sector reached 198 billion RMB, equivalent to 85% of the pre-tax recurring profit. Lastly, the revenue per capita in the sector increased by 7% year-on-year, the sales and management expense ratio decreased by 0.2 percentage points, the basic service gross margin was 15.3%, down slightly by 0.6 percentage points compared to the same period in 2023, and the core net profit margin was 8.5%, down by 0.7 percentage points compared to 2023. Keyword 3: Withdrawal: The sector is increasing its withdrawal efforts. For example, according to announcements, GREENTOWN SER and CHINA OVS PPT withdrew 36.9 million square meters and 44.5 million square meters respectively. The withdrawal of loss-making projects is crucial to maintaining the sector's profitability and reflects the end of companies' blindly pursuing scale. The bank believes that there are significant differences in the profitability of different projects, and it is difficult to raise prices for existing projects. The industry has no room to significantly control costs further for the entire market, but there is indeed room to continue large-scale withdrawals and improve the quality of external development. The bank predicts that more companies may increase their withdrawal efforts in 2025 to protect profit rather than revenue, further promoting industry marketization and aligning quality and price. Keyword 4: Quality improvement: The industry has encountered cyclical difficulties, but in turn has improved the quality of revenue and profits. As overall sales of commercial housing continue to decline, the contribution of non-owner value-added services and profits from developer-oriented businesses has decreased significantly. In 2024, the proportion of non-owner value-added service income was only 7.5%, down 8.5 percentage points from 2020, with a gross profit margin of only 6.6%, down by 15.9 percentage points from 2020. Business related to the development cycle has had a minor impact on the overall performance of the sector (expected to continue to decline). The proportion of owner value-added service income decreased by 1.0 percentage point to 10.8%, but the gross profit margin remained above 30%, basically stable. It is evident that the impact on the profitability of companies from value-added services, which contribute significantly to profits, is not significant. Keyword 5: Dividends: As the industry has abundant cash reserves, continues to enjoy net cash flow inflows, and lacks the necessity for major capital expenditures, dividends are further increased. By the end of 2024, the sector had cash and cash equivalents of 84.7 billion RMB, equivalent to 53% of the sector's market value, providing for cash dividends for over 8 years at the current dividend level. The sector's net cash flow from operating activities was 198 billion RMB for the year, covering the sector's actual cash dividends nearly twice. The far exceeds the size of dividends, the net inflow of operating cash flow continue to boost cash reserves. Compared to the end of 2023, the sector's cash and cash equivalents increased by about 6 billion RMB in 2024. In the medium term, the bank believes that considering the seasonal imbalance of operating funds in the property service sector, a reasonable dividend payout ratio is 70% (but this percentage might be further increased if considering property management business). In the short term, some companies still have interest-bearing liabilities to repay. The bank predicts that the sector's dividend payout ratio will slightly increase to 66% in 2025, with an average dividend yield level of 7.6%. Compared to other dividend sectors, the property service industry has an advantage in dividend yield, performance stability, and cash flow generation. Risk warning There are significant differences in the cash flow generation capabilities of companies, with some companies having significant discrepancies between OCF and core net profit; although the bank believes that the industry is fully capable of significantly increasing its dividend payout levels, there is also a possibility that some companies will continue to have a low willingness to pay dividends; withdrawal may increase a company's profitability, however, this method of increasing profitability is not sustainable in the medium to long term.