The sequelae of cash mergers and acquisitions in the property management industry, the impairment of goodwill drags down profits, and Ya Life is no longer only based on scale

The property management industry has entered a period of deep adjustment, and leading enterprises have fallen into the dilemma of increasing revenue but not increasing profits.

On the evening of March 25, Ya Life Service (03319. HK, hereinafter referred to as "Ya Life") released its 2023 annual results, during the reporting period, Ya Life recorded revenue of 15.44 billion yuan, an increase of 0.4% year-on-year. Among them, the revenue from property management services increased by 7.8% year-on-year to RMB10.81 billion, the revenue from value-added services for owners increased by 0.6% year-on-year to RMB2.33 billion, the revenue from urban services increased by 5.5% year-on-year to RMB1.39 billion, and the revenue from extended value-added services decreased by 46.6% year-on-year to RMB910 million.

Revenue growth did not lead to an increase in profits. In 2023, Ya Living will achieve gross profit of approximately RMB2.65 billion, a year-on-year decrease of 21.8%, gross profit margin of 17.1%, a year-on-year decrease of 4.9 percentage points, a net profit of approximately RMB700 million, a year-on-year decrease of 63.9%, and a net profit margin of 4.5%, a year-on-year decrease of 8.1 percentage points.

Ya Life pointed out that the reasons for the decline in net profit are, firstly, the adjustment of business structure, the increase in the proportion of non-cyclical businesses (property management services, value-added services for owners and urban services) and the increase in operating costs, and secondly, the provision for impairment of trade and other receivables and goodwill out of the principle of prudence.

However, impairment of goodwill or impairment provisions for accounts receivable of related parties are not uncommon in today's property management industry. In addition to Ya Life, companies such as Country Garden Services, Jinke Services, Hongyang Services and Landsea Green Life have also made relevant early warnings or impairment provisions.

Source: Picture Worm Creative

Mergers and acquisitions, goodwill impairment dragged down profits

The non-cyclical business, which accounts for more than 9% of the revenue of Ya Life, has seen an increase in revenue but a decline in gross profit and gross profit margin.

According to the financial report, in 2023, the non-cyclical business of Ya Life will achieve revenue of 14.53 billion yuan, an increase of 6.3% year-on-year, the proportion of business revenue in total revenue will be 94.1%, an increase of 5.2 percentage points year-on-year, gross profit will be about 2.5 billion yuan, a year-on-year decrease of 15.7%, and a gross profit margin of 17.2%, a year-on-year decrease of 4.5 percentage points.

Affected by real estate development-related businesses, the revenue of Ya Life's extended value-added service business declined significantly.

Specifically, the extended value-added service business of Ya Life includes case site property management services, property marketing agency services and housing inspection services. In 2023, the business achieved revenue of 910 million yuan, down 46.6% year-on-year, accounting for 5.9% of total revenue, down 5.2 percentage points year-on-year, gross profit of about 140 million yuan, down 65.5% year-on-year, and gross profit margin of 15.8%, down 8.6 percentage points year-on-year.

According to the report, the decline in the gross profit margin of the extended value-added services business was mainly due to the decline in the service demand and business scale of developers due to the impact of the real estate downturn, but the related business cost investment was still high.

Impairment provisions for trade and other receivables and goodwill impairment losses also had an impact on the net profit of A-Life.

Among them, the impairment provision for trade and other receivables reached 540 million yuan, a year-on-year increase of 14.9%. Previously, Ya Life had issued a profit warning, saying that the company had made an impairment provision of about 200 million yuan to 300 million yuan for the trade receivables of related party customers, mainly due to major changes in the supply and demand relationship in the real estate market, and related party customers faced periodic liquidity pressure, resulting in the growth of the settlement cycle of related party business. Therefore, the Company prudently evaluates the amount of impairment provision for trade receivables of related party customers and makes reasonable accounting estimates.

In 2023, the goodwill impairment loss generated by Ya Living will reach 430 million yuan, while there will be no related losses in the same period in 2022. Goodwill is mainly generated from the expected future development of member companies, the improvement of market coverage, the expansion of service portfolio, the integration of value-added services and the improvement of management efficiency. The annual report pointed out that the related loss in 2023 was mainly due to the failure of the business expansion of some subsidiaries acquired and acquired in previous years to carry out as expected, and the company adjusted this part of the business, resulting in a decline in its revenue and profit.

However, if the impact of relevant data is excluded, the core net profit of Ya Life has also declined. According to the report, the adjusted core net profit of Ya Living was 1.55 billion yuan, a year-on-year decrease of 30.3%, which excludes the amortization of intangible assets, goodwill impairment losses, profits and losses on disposal of subsidiaries, borrowing interest expenses, changes in the fair value of put options, changes in profits and losses on financial assets measured at fair value and through profit and loss, interest income, and net impairment losses on financial assets.

Not only the theory of scale, but also the prudent expansion

The "sequelae" of mergers and acquisitions of property management enterprises have been reflected in the annual reports.

According to the performance announcement released by Country Garden Services, a leading property management company, on March 27, the impairment loss of the company's financial assets and contract assets reached 2.59 billion yuan, the net impairment loss of goodwill and other intangible assets was about 1.48 billion yuan, and the net profit decreased by 77.2% year-on-year to 520 million yuan.

Hongyang Services recently officially released a performance announcement, which showed that the company's net profit in 2023 will be 14.234 million yuan, a decrease of 84.8% from 2022, mainly due to the impact of the market environment of the real estate industry, the increase in impairment provisions for related party receivables, as well as the decrease in demand for real estate development project services, and the decline in non-owner value-added service income.

Looking at the property management industry, goodwill impairment is mainly the "sequelae" brought about by past mergers and acquisitions. Due to the demand for scale, the number of mergers and acquisitions in the property management industry has decreased year by year after reaching a peak in 2021. According to the incomplete statistics of CRIC Property Management, from 2021 to 2023, the number of mergers and acquisitions of listed property enterprises each year will be 53, 53 and 42 respectively, and the disclosed mergers and acquisitions will be 35.588 billion yuan, 10.609 billion yuan and 3.373 billion yuan respectively.

After the M&A cooled down, property companies have become cautious about scale, and Ya Life is no exception. As of December 31, 2023, the Company had 590 million square meters of area under management, an increase of 8.2% year-on-year, and a contracted area of nearly 770 million square meters, an increase of 4.8% year-on-year.

Although the scale of Ya Life is still expanding, the growth rate is decreasing year by year. From 2020 to 2023, the area under management will increase by 140 million square meters, 110 million square meters, 56.93 million square meters and 44.7 million square meters, respectively, and the contracted area will increase by 170 million square meters, 140 million square meters, 68.4 million square meters and 35.1 million square meters, respectively. During the period, 2020 was the fastest growth year, with a year-on-year increase of 60.2% in the area under management and a 46.7% year-on-year increase in the contracted area.

Despite this, Ya Life is still at the head of the industry. According to CRIC Property Management, the threshold value of the area under management of the top 10 enterprises in 2023 will reach 340 million square meters. Among them, there are only 5 companies with an area under management exceeding 500 million square meters, while Ya Life has an area of 590 million square meters under management.

Times Finance learned that the management of Ya Life revealed to investors in a conference call held on March 26 that the company will "expand with quality" in the future, that is, "with good cash flow and strong profitability as the basic principles, selectively expand, not only pursue scale, but also pay attention to project transformation and quality reputation", continue to deepen the implementation of "one city, one policy", "product classification" and other expansion strategies, and continue to maintain leading market-oriented capabilities.