Country Garden Services Earnings Will Rebound off a Low Base in 2022; Shares Attractive

We maintain our fair value estimate of HKD 42.50 for no-moat Country Garden Services, or CGS. While the company reported subdued earnings for 2022, they were in line with its profit warning. We think the worst is behind the company, and most of the short-run negatives have been reflected in its current share price. Looking forward, gross margin is set to rebound under resuming operating leverage of property management service and community value-added service, or VAS. Also, we view the goodwill impairment and pandemic-related costs as nonrecurring, which will help double the earnings per share in 2023. While heightened competition moderates our revenue growth outlook, CGS will likely maintain solid profitability given its asset-light business model and effective cost control. Our fair value estimate suggests a 2023 price/earnings ratio of 24.1 times, close to the low end of 20-50 times in 2019-21. In addition, investors welcomed the special dividend of CNY 0.23 per share, which drove up the payout ratio to over 60%. We think CGS will leverage ample cash at hand to maintain payout and seek expansion opportunities.