CICC published a research report stating that based on adjustments to ES Services' (01995) segmented business structure and gross margin, the firm lowered its 2025 and 2026 earnings forecasts by 16% and 15% respectively to RMB 4.2 billion and RMB 4.4 billion (representing year-over-year declines of 12% and growth of 5% respectively). The firm maintains its outperform rating while cutting the target price by 7% to HK$2.33 (corresponding to 8.7x 2025 target P/E ratio and 8.0% expected dividend yield, implying 12% upside potential), primarily reflecting earnings forecast adjustments and potential dividend yield support. The company currently trades at 7.8x 2025 P/E ratio and 9.0% expected dividend yield (based on 50% regular dividend and 20% special dividend ratios).
CICC's main views are as follows:
1H25 Performance Below Market Expectations The company announced 1H25 results: revenue increased 3% year-over-year to RMB 3.46 billion, while net profit attributable to shareholders fell 19% year-over-year to RMB 210 million, below market expectations, mainly due to declining gross margins in core businesses and increased provisions for accounts receivable impairment. The company proposed an interim dividend of HK$0.095 per share, with a payout ratio of 70% (50% regular dividend, 20% special dividend), corresponding to a 4.4% interim dividend yield.
Third-Party Expansion Maintains Strong Momentum In the first half of 2025, the company's third-party expansion corresponded to annualized contract value of approximately RMB 870 million, reaching a historical high for six months (up 9% year-over-year) against the backdrop of a high base in the same period last year. The company continues to advance its strategy of focusing on core regions, with three regional companies achieving breakthrough contract values exceeding RMB 100 million in the half-year. In the first half, the company's gross floor area under management increased 7% year-over-year to 254 million square meters. The company continued to divest some non-core city and low-quality, low-efficiency projects, with divested projects corresponding to 15.68 million square meters of managed area, ensuring operational quality of the managed project portfolio.
Core Business Gross Margin Under Pressure, Operating Cash Flow Outflow Expands In the first half of 2025, the company's core business gross margin faced certain pressure, with basic property management gross margin declining 2 percentage points year-over-year to 18.5%, mainly due to increased labor costs and enhanced service quality and basic investments. Community value-added services gross margin fell 8.9 percentage points year-over-year to 28.2%, primarily due to decreased proportion of high-margin businesses such as parking space sales and leasing, while investment in developing self-operated capabilities for some businesses increased. In the first half, selling and administrative expense ratio decreased 0.6 percentage points year-over-year to 6.6%, mainly benefiting from continued optimization of middle and back-office management efficiency.
Operating cash flow recorded a net outflow of RMB 230 million in the first half, compared to an inflow of RMB 100 million in the same period last year. The expanded outflow was mainly due to pressure on collection rates year-over-year and increased accounts receivable balances. The company stated it will intensify collection efforts in the second half, targeting positive operating cash flow for the full year.
"Second Five-Year" Strategy Strengthens Internal Capabilities, Focus on Company's Future Cash Flow Performance and Shareholder Returns Facing industry and economic environmental challenges, the company stated it will continue to advance strategic transformation and strengthen internal capabilities, building systematic organizational capabilities. It will persist in transforming business, service awareness, service models, team capabilities, and organization, ensuring competitiveness amid ongoing policy standardization and continuous market competition through improved service quality, optimized cost structure, and enhanced team capabilities.
The firm believes that under the backdrop of earnings pressure, the company's operating cash flow performance and shareholder returns are among the core factors affecting future stock price performance. Investors are advised to continuously monitor operating cash flow and dividend distribution performance.
Risk Warnings: Risk of operating cash flow and dividend performance falling short of expectations, risk of accounts receivable collection and impairment exceeding expectations.