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The first half-year report performance of Xu Binhuai, the new president of Country Garden Services, is probably not very good. While "revenue increased but profit did not", cash flow also dropped significantly.

Data disclosed by the company show that in the first half of 2024, Country Garden Services' total revenue will be approximately RMB 21.046 billion, a year-on-year increase of approximately 1.5%. This growth rate is significantly lower than the same period from 2021 to 2022, and also lower than the 3.4% growth rate in the same period of 2023.

Specifically, the revenue from property management services, which is the core business, reached 12.75 billion yuan, a year-on-year increase of 4.6%, accounting for about 60.6% of the total revenue; the revenue from community value-added services was about 1.998 billion yuan, and the "three supplies and one heating" business achieved revenue of 3.345 billion yuan, also a year-on-year increase.

The revenue of the other three major businesses declined. Among them, the non-owner service revenue was about 356 million yuan, a year-on-year decrease of 63.4%, the urban service business revenue was 2.17 billion yuan, a year-on-year decrease of 9.4%; the commercial operation service business revenue was 332 million yuan, a year-on-year decrease of 37.9%.

Although the overall revenue increased, the increase in various service costs and sales costs dragged down the gross profit and gross profit margin during the reporting period. As of the end of June, Country Garden Services achieved a gross profit of 5.553 billion yuan, a year-on-year decrease of 13.7%, and the overall gross profit margin was about 21.2%, a year-on-year decrease of 3.7 percentage points.

Regarding the decline in gross profit margin, Country Garden Services said that on the one hand, out of the principle of prudence, after providing services to certain customers with significantly increased credit risks since August 2023, the consideration collected will be recognized as revenue only when the performance obligations are completed and the consideration from the customer has been collected; on the other hand, due to the influence of external unfavorable factors, corporate management factors, the different gross profit margins of various businesses and changes in their proportions in total revenue, and the active improvement of service quality, the gross profit margins of other businesses except property management and other related services in the "three supplies and one industry" business division have declined.

Huang Peng, Executive President and Chief Financial Officer of Country Garden Services, further explained at the performance meeting that the company took the initiative to reduce some of its businesses, which lowered its gross profit and gross 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 the contract and dispose of some businesses, resulting in the company's loss of more than 1 billion yuan in commercial management and operation income and nearly 100 million yuan in net profit.

Under multiple influences, Country Garden Services' profit performance also fell by more than 30%. As of the end of the reporting period, the company achieved a net profit of 1.546 billion yuan, a year-on-year decrease of 37.9%; the profit attributable to shareholders of the company was about 1.44 billion yuan, a year-on-year decrease of 38.7%; the core net profit attributable to shareholders of the company was 1.84 billion yuan, a year-on-year decrease of 31.7%.

The sharp drop in net profit also further affected the cash flow performance of Country Garden Services. As of the end of June, the company's net cash from operating activities was about 270 million yuan, a sharp drop of 87.7% year-on-year from 2.192 billion yuan in the same period last year.

Country Garden Services explained that, firstly, it was affected by the year-on-year decline in net profit; secondly, the growth rate of risky customer business and charges to small property owners was lower than that of the scale, which led to a year-on-year decline in the comprehensive charging rate, and thus an increase in accounts receivable; affected by unfavorable factors such as the external environment, the pre-deposited property fees decreased; and thirdly, it was due to the periodic capital fluctuations generated by daily operating activities.

Among them, accounts receivable have increased significantly. It is disclosed that as of the end of June, the scale of trade receivables of Country Garden Services was 21.958 billion yuan, an increase of about 2.4 billion yuan compared with the end of 2023. Specifically, accounts receivable with an age of more than one year totaled 8.7 billion yuan, an increase of about 33% from the beginning of the year. Among them, accounts receivable with an age of one to two years were about 6.077 billion yuan, an increase of 11.28% from the beginning of the year; accounts receivable with an age of two to three years were 2.022 billion yuan, an increase of 202.24% from the beginning of the year; and accounts receivable with an age of more than three years were about 601 million yuan, an increase of about 59% from the beginning of the year.

In order to cope with the rising accounts receivable, Huang Peng said that a debt recovery committee has been established, composed of company executives, which will issue tasks and comprehensively promote the recovery of various debts through strong organizational guarantees.

Xu Binhuai added that among the three factors mentioned above, the impact of the decline in operating net profit on cash flow is within expectations. "Due to the decline in non-owner value-added services and other reasons, when we formulated the business plan at the beginning of the year, the net profit target for 2024 was lower than that for 2023. We believe that the current decline is relatively controllable. If we can achieve the established net profit target by the end of the year, then the cash flow target will have a new foundation."

In addition, the periodic increase in funds generated by daily operating activities also had an impact on cash flow. Xu Binhuai gave an example, saying that in the first half of the year, he participated in more market expansion projects, which resulted in a relatively large investment in security deposits. He emphasized that this was not the reason for the unhealthy cash flow. While strengthening expenditure management in the second half of the year, more attention should still be paid to capital inflows, that is, collection and prepayment.

Xu Binhuai said that in terms of prepayment, the attractiveness of property fee prepayment will be increased in the second half of the year, such as organically combining integrated marketing business and property fee prepayment, and promoting property fee prepayment through more activities.

Country Garden Services has provided more countermeasures. Xu Binhuai said that for small owners, it is necessary to consolidate responsibilities, identify the precise reasons, use specific methods, and give greater support in management measures and incentives to ensure that the collection of small owners returns to a healthy level. "From the operating results of previous years, the collection of property fees always performs better at the end of the year than in the middle of the year, so at the end of the year we hope to make up for the few points of the decline in the collection rate in the middle of the year. We are quite confident about this."

In terms of risky customers, Country Garden Services has set up a special committee to recover outstanding debts, with sufficient support from the board of directors to the highest level of management. Country Garden Services disclosed that it has taken active measures to recover overdue accounts receivable, including but not limited to debt-equity swaps, litigation or arbitration, and has achieved initial results.

Even so, Xu Binhuai still said, "Frankly speaking, it is still difficult to collect cash from risky customers at present. We are more focused on locking in our due rights and interests through various means, which will slowly turn into cash flow in the second half of the year and in the future." He said that it will still take some time to realize assets.

He particularly pointed out that in the first half of the year, Country Garden Services has made relatively many achievements in the management of risky customers, such as debt-equity swaps, and a considerable amount of assets have been used to repay debts, but some processes are still in progress and have not yet been fully reflected in the cash flow statement.

Xu Binhuai also issued a "military order" for the cash flow performance in the second half of the year. "We still need to take strong measures to make a good comeback at the end of the third quarter, so as to provide strong guarantee for the collection and recovery of debts throughout the year and provide strong support for cash flow."

Regarding the annual report of Country Garden Services, Nomura Securities pointed out that the decline in the company's performance was in line with expectations, but its weak cash flow was worrying. The company's net cash from operating activities fell by more than 80%, only 270 million yuan, accounting for about 1% of interim revenue and 15% of adjusted net profit. The main reason was the increased difficulty in collecting property management fees. Nomura believes that the widening gap between cash flow and revenue/profit indicates a high risk of impairment losses, which is a factor affecting the company's profitability. Based on this, Nomura lowered the target price of Country Garden Services by 25.9%, from HK$5.4 to HK$4, and rated it "neutral".