Country Garden Services Shows Gross Margin Miss in Full Year Results, but Growth Prospects Remain Positive

No-moat Country Garden Services, or CGS’, full year 2021 results saw a margin disappointment. Gross margin decreased by 3.3 percentage points to 30.7% compared to a year before, mainly due to the higher percentage contribution of city services, which have a relatively low gross profit margin, and absence of exemption and reduction of social security contributions attributed to the pandemic. However, in our view, that did not derail the positives from the strong year-on-year revenue and net earnings growth at 85% and 50% respectively. Final dividend of CNY 0.2995 per share also rose 36.9% year on year on the back of higher profits. We adjust our earnings estimates with gross margins lowered and accordingly revise our fair value estimate to HKD 73 from HKD 85 per share, but maintain our view that despite heavy sector headwinds, CGS should deliver strong earnings this year. This is given the visibility of the growth in the property management services segment with incremental growth from mergers and acquisitions consolidation. Gross margins may also see gradual improvement as the acquired companies experience better profitability after consolidation.