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"The start of this year was relatively difficult, and investors may consider the operating results to be less than ideal, but the entire management team will actively implement the company's strategy, develop steadily and strive to achieve the goals set by the end of the year." On August 22, Huang Peng, CEO of Country Garden Services (06098.HK), said at the interim results briefing.

At noon that day, after the leading property stock disclosed its interim results for 2024, its share price continued to fall. Country Garden Services had a large trading volume of about HK$150 million throughout the day and closed down 5.47%.

The financial report shows that during the reporting period, Country Garden Services achieved revenue of 21.046 billion yuan, a year-on-year increase of 1.5%. Among them, the core property management service revenue was approximately 12.752 billion yuan, a year-on-year increase of approximately 4.6%, and the proportion of total revenue further increased to approximately 60.6%.

As of the end of the reporting period, in addition to the "three supplies and one industry" business, Country Garden's service contract management area was approximately 1.635 billion square meters, and the fee management area increased from 916 million square meters three years ago to approximately 1.006 billion square meters. The increase was mainly due to the conversion of the contract management area of ​​the Group's property reserves developed by Country Garden Real Estate Group into fee management area during the period, as well as the increase in fee management area from third parties due to active external expansion.

"In the first half of this year, we have achieved continued leadership in scale, steady growth in revenue, and independent market-oriented development of our business." At the performance briefing, Country Garden Services President Xu Binhuai, while pointing out the operating highlights in the first half of the year, also frankly pointed out the issues that investors are most concerned about, "The year-on-year decline in net profit and the decline in operating cash flow are indeed two issues presented in the performance report."

According to the financial report, in the first half of this year, Country Garden Services achieved a net profit of 1.44 billion yuan, a year-on-year decrease of 38.7%; the cash flow indicator from operating activities fell sharply by 87.7% year-on-year, from 2.19 billion yuan in the same period last year to 270 million yuan. Stable and sustainable net cash flow is one of the most important characteristics of property stocks. Why did Country Garden Services' cash flow fluctuate so much? Investors are paying close attention.

Regarding the decline in net profit, Huang Peng explained that the company took the initiative to reduce some businesses, which lowered the gross profit and gross profit margin. For example, in commercial operation services, in order to meet the needs of risky customers for debt settlement and asset disposal, the two parties negotiated to terminate some business contracts, resulting in the company's loss of more than 1 billion yuan in business management and operation income and nearly 100 million yuan in net profit. "These things may need to be faced in the process of labor pains, and they will need to be dealt with sooner or later." Huang Peng said.

As for the sharp fluctuations in operating cash flow, in addition to the decline in net profit, Huang Peng attributed it to two main reasons: the first is the increase in accounts receivable from risky merchants and small owners, and the second is the decrease in property fees prepaid by owners. Huang Peng said, "For business from risky merchants, such as vacancy fees, etc., it is impossible to stop, but it cannot be included in revenue. Ultimately, it is reflected in the increase in accounts receivable because the business from risky merchants and the fees charged to small owners are not as fast as the scale growth."

It is reported that, out of prudence, Country Garden Services will recognize the consideration received as revenue after providing services to certain customers with significantly increased credit risk from August 2023, when the company has fulfilled its performance obligations and received the consideration from the customers. The financial report shows that as of the end of June 2024, the scale of Country Garden Services' trade receivables was 21.958 billion yuan, and at the end of 2023 it was 19.511 billion yuan, an increase of about 2.4 billion yuan, of which receivables aged more than 3 years increased from 376 million yuan to 601 million yuan.

In order to cope with the rapid increase in accounts receivable, Huang Peng revealed that the company has set up a debt recovery committee, which is composed of some senior executives of the company. Through the implementation of strong organizational guarantees, tasks are assigned and various debt recovery measures are comprehensively promoted. At the same time, the company has adopted a series of collection measures for overdue accounts receivable, such as debt-equity swaps, litigation or arbitration, which may gradually be converted into cash flow in the future.

Xu Binhuai said, "Our theme today is 'Hold on to the green mountains and never let go, there will be a time to ride the wind and waves'. Holding on to the green mountains and never let go represents the determination and tenacity of our management team. There will be a time to ride the wind and waves represents the team's expectations for the future and an optimistic attitude. I believe that through periodic adjustments and capacity building, we hope to achieve greater development in the future."