Deteriorating cash flow and high proportion of receivables impaired Great Wall property performance potential thunder risk?

Great Wall Property, the largest independent property management company, “injured” sprinting into Hong Kong stocks?

The wave of property listings that started in 2020 has continued to this day, and it has become more and more intense. Up to now, about 30 property companies have submitted forms, including the Great Wall properties that have recently been submitted.

Compared with most small property companies gathered on the Hong Kong Stock Exchange, with the aura of the “largest independent property company” and the endorsement of Country Garden Services, Great Wall Property has become the focus of attention as soon as it is handed over. With more information disclosed in the prospectus, the fundamentals of this independent property company are exposed to the spotlight. What kind of real estate company is Great Wall Property? Under the divergence of the capital market of property and enterprise, can Great Wall Property get a positive vote in the capital market? 

Decline in revenue growth and weak profitability

Since its establishment in 1993, Great Wall Property has gone through 28 springs and autumns and has developed into the largest independent property enterprise in China. According to the data, as of the end of the first quarter of 2021, Great Wall Property has 708 projects under management and 855 contract management projects, with a total construction area under management of 115 million square meters and a total construction area under contract management of 153 million square meters.

Deteriorating cash flow and high proportion of receivables impaired Great Wall property performance potential thunder risk?

The service area is basically the same as that of Xinchengyue Service and Yongsheng Life Service. The difference is that Xinchengyue Service and Yongsheng Life Service are backed by Xincheng Holdings and CIFI Group, and they were born with the “gold spoon”. The company was backed by real estate enterprises can obtain more in scale expansion and development and more convenient , the Great Wall of property need to rely more on their ability to expand.

In the wave of the spin-off and listing of property companies , Great Wall Property’s “first independent” property management label has given the capital market a good memory point. However, to gain recognition from the capital market, it needs to look at its growth and profitability. What is invested is the future.

From the data perspective, Great Wall Property has achieved good results in the past. According to the prospectus, the operating income of Great Wall Property from 2018 to 2020 and the first quarter of 2021 was 2.404 billion yuan, 2.81 billion yuan, 3.36 billion yuan, and 784 million yuan; the overall gross profit margin for the same period was 17%, 18.3%, and 21. %, 19.8% and 21.1%.

The overall revenue is growing. It should be noted that the growth rate of Great Wall Property’s revenue has declined significantly. The year-on-year growth rate of revenue in 2019 and 2020 is 16.89% and 8.04% respectively. At the same time, the gross profit margin of Great Wall Property is also far lower. At the industry average of 28.28%, its net profit margin in 2020 is also lower than the industry average of 14.1% over the same period, which is only 6.8%.

Profitability is one of the most important indicators in the capital market. In the torrent of listed property companies, the profitability of Great Wall Property has become a major flaw. 

The pace of expansion slows down and sustainable development is doubtful

At present, the property industry is experiencing a period of high growth in staking horses and enclosing land. Leading property companies continue to experience “big fish eating big fish”. However, Great Wall Property is in a state of weak expansion at this time, and the company’s future growth is latent.

The data shows that as of 2018-2020 and the first quarter of 2021, the total construction area of ​​Great Wall Properties’ contracted management projects is 98 million square meters, 133 million square meters, 153.1 million square meters and 152.8 million square meters, respectively.

From the data side, it is obvious that in the first quarter of 2021, the area of ​​Great Wall Property contracted management projects has declined; looking at the area of ​​new contracted projects, the area of ​​new contracted projects in 2018-2020 and the first quarter of 2021 will be 19.3 million square meters and 37.3 million, respectively. 10,000 square meters, 27.7 million square meters and 4.1 million square meters, the area of ​​newly contracted projects is also in decline.

In terms of external expansion, no gratifying results have been achieved. With regard to the renewal of existing properties, the renewal rate of Great Wall Properties has shown a downward trend. In 2018-2020 and as of the end of the first quarter of 2021, the renewal rates of its property management service agreements were 95.2%, 92.5%, 93.3% and 88.2%, respectively. Especially in the first quarter of 2021, the decline was significant.

It should be noted that the Great Wall of property also face rising labor costs and subcontractors to transitive industry fare hikes difficult problem, in terms of the collection of property charges also encountered some trouble. From 2018 to 2020, the collection rates of Great Wall Properties’ property management fees were 76.1%, 78.6%, and 81.1%, which were far lower than the average collection rate of 93.57% of service fees for the top 100 property companies in 2020.

The collection rate of property fees is low, and Great Wall Property has to take legal measures. According to the data from Tianyan Check , there were as many as 160 lawsuits by Great Wall Property in the first half of 2021, most of which were brought to court by Great Wall Property and required the owner to pay property management fees. , Late payment fees. On the other hand, the owner questioned the service quality of Great Wall Property.

The conflict between Great Wall Property and the owner broke out, and eventually the two parties terminated the service agreement. According to the prospectus, Great Wall Properties terminated 134 service agreements, 70 of which were voluntarily terminated. One of the most important reasons was that the owners failed to pay.

Industry insiders pointed out that the essence of property is service. During rapid expansion, more attention should be paid to improved service quality. Good service and brand reputation will directly help the company to accelerate expansion and increase profitability; if there is no good The support of service quality will affect the sustainable development ability of material enterprises.

In-depth analysis found that the expansion of Great Wall properties and the slowdown in revenue growth are related to its business structure. Property management accounted for 76.3% of revenue in 2020, and the contribution of value-added service revenue was low. The revenue growth of Great Wall Properties relied heavily on the expansion of management area, and its scale expansion encountered bottlenecks, which directly led to weak revenue growth.

2020 is the first year of the real estate industry’s outbreak. Major property companies have embraced the capital market and accelerated their scale expansion; however, Great Wall Property entered a period of stagnation in growth at this time. Industry insiders pointed out that perhaps because the competition in the property industry was not so fierce earlier, Great Wall Property has a better development environment. When the external competition intensifies, it will accelerate the survival of the fittest in the industry; it may also be that the company has difficulties in expansion and strategic transformation. Other styles of play.

Competition in the capital market is cruel, and the results of operations will be reflected in financial indicators. At present, scale and profitability as well as differentiated competition are important to capital. From this point of view, Great Wall Property needs to accelerate the pace of consolidating competitiveness . 

The rapid growth of receivables accounts for up to 20% of impairment reserves

The slowdown in expansion and weak service quality are reflected in financial data as a decline in net current assets, a deterioration in operating cash flow, and an increase in accounts receivable.

The prospectus disclosed that the current assets of Great Wall Properties decreased from 149.7 million yuan at the end of 2020 to 888.7 million yuan at the end of the first quarter of 2021, a drop of as much as 40%. At the same time, due to the low property fee collection rate and other reasons, Great Wall Property’s trade receivables have increased rapidly, reaching 883 million yuan by the end of 2020. By the end of the first quarter of 2021, Great Wall Property’s trade receivables have increased to 1.083 billion yuan, an increase of 22% in three months.

The rapid growth of trade receivables directly impacted the cash flow of Great Wall Property. The data shows that as of the end of 2020 and the end of the first quarter of 2021, the operating cash flow of Great Wall Properties was -71 million yuan and -121 million yuan, respectively.

Generally speaking, negative operating cash flow mainly occurs in companies that are in a period of rapid expansion. However, Great Wall Property has not been in a state of rapid expansion as a whole in 2020 and 2021, so its negative cash flow is not due to strategic expansion. Combined with the increase in trade receivables, there are operating reasons for the deterioration of its cash flow.

One of the important reasons for the property industry to gain recognition in the capital market is to have a stable cash flow, which is precisely the shortcoming of Great Wall Property.

At the same time, what needs to be more vigilant is that as of December 31, 2018, 2019, 2020, and March 31, 2021, the impairment provision of Great Wall Property’s trade receivables was 122 million yuan and RMB 1.81 respectively. 100 million yuan, 193 million yuan and 206 million yuan, the overall trend is rapid growth, accounting for approximately 16.6%, 22.2%, 21.8%, and 19% of trade and receivables in the same period.

In terms of aging, Great Wall Property’s trade receivables at the end of 2018-2020 and the end of the first quarter of 2021 accounted for 15.9%, 18.9%, 19.2%, and 15.9% respectively; in the same period, Great Wall Property had more than five years The aging trade receivables have been growing. Generally speaking, the longer the account period, the more difficult it is to recover.

Up to 20% of the provision for impairment of trade receivables is already at a relatively high level in the industry. Once the payment is confirmed to be uncollectible, a high percentage of impairment provisions will directly erode the profits of the listed company and adversely affect the cash flow situation and operating capital. 

It should be noted that in the trade and other receivables of Great Wall Property, related parties have a certain proportion, and the overall increase.

From service quality issues to the termination of the contract with the owners in court, to the decline in the contract renewal rate, Great Wall Property, which faces the bottleneck of expansion, has great uncertainty in its future development prospects.

At the same time, Hexun Real Estate noted that as of the end of the first quarter of 2021, Great Wall Property’s financial liabilities amounted to 1.33 billion yuan due within one year, accounting for 95.5% of the total financial liabilities. At the same time, cash and cash equivalents in the same period Only 366 million yuan. In the case of negative operating cash flow and short-term financial pressure, listing may be a good solution, but in the long run, the problem of growth needs to be resolved urgently.

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