china property management...2020/09/04 · 4 sep, 2020 china property management doris wong...

4 Sep, 2020

China Property Management

Doris [email protected]

(852) 2323-5118

Dexter [email protected]

(852) 2352-1136

Turning selective in the increasingly crowded space

Source: Bloomberg, Anli ResearchNotes: P/E based on bloomberg consensus except CGS, S-Enjoy

Sector Performance

2020 YTD Return

All listed property management companies (PMCs) reported their 1H20 results in end-Aug, with revenue/net profit +37/63% YoY and both contracted/revenue-bearing GFA +33% YoY on average. This set of strong results reinforces the belief of the counter-cyclical nature of the property management sector during pandemic and economic downturn. We expect the market would revise upward the earnings expectation following the better-than-expected results and optimistic management guidance. Our top picks are Country Garden Services (6098.HK) among big-caps; S-Enjoy Services (1755.HK) among mid-caps.

We believe the industry is still in the rapid growth phase and the industry consolidation is likely to further accelerate in the coming years. While competition in sizable projects for M&A is fierce, PMCs have been emphasizing value-added services (VAS). We believe VAS would continue to be the fastest-growing business segment in the Top 100 PMCs, property management services (PMS) and VAS would grow at 14.9%/31.8% in 2019-2022 (vs. CARG 16.1/25.3% in 2015-2019).

With more PMCs listed in recent years and there are more quality names to come in 2H20/1H21, we believe the market would turn more selective in the PM sector. Among PMCs with high earnings visibility measured by >1x reserve/revenue-bearing GFA ratio, we prefer two types of capabilities: 1) organic third-party expansion ability; 2) execution ability and efficient community VAS operation.

Fig.1: China property management - Valuation summary

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Anli Research 4 Sep, 2020

For those PMCs with higher reserve/revenue-bearing GFA ratio were usually given high valuation due to higher earnings growth visibility, yet the organic growth ability in obtaining third-party GFA without much dependence on parent company is vital in the future. We believe the market increasingly favors PMCs with more GFA/revenue contribution from independent developers which could reflect their management and operation efficiency.

In the past years, PMCs with strong support from parent are favored by the market (eg. Country Garden Services, Poly Property Services). Yet we believe the market has been shifting the preference toward third-party expansion. A clear example of this is Ever Sunshine, only 50% of revenue-bearing GFA is contributed by parent CIFI holdings in FY19. Yet the valuation is continuously being upgraded since FY19 results which proved its third-party expansion ability due to strong branding in the Yangtze River Delta. We believe the next winner is likely the one which can show such ability.

Organic third-party expansion ability

Source: Bloomberg, Anli Research

Fig.2: Valuation of Ever Sunshine has been re-rating since Mar 20 due to strong third-parties expansion ability

Fig.3: PMC's VAS is expected to accelerate in the next few years

Source: Bloomberg, Anli Research estimates

Source: Bloomberg, Anli Research estimates

Fig.4: CGS and S-Enjoy fall into our selection preference



GFA growth and non-community VAS are cyclical in nature and resonate with property development cycle. Most PMCs have been leveraging their platforms to develop community VAS (including community retail, household decoration etc) and even extend to city services that serve governments and non-residential properties owners. We believe this part is huge blue ocean market, and more importantly, the non-cyclical community VAS can help uplift PMC’s valuation if the share of this part grows large enough.

Non-cyclical community VAS business

Source: Company Data, Anli Research Source: Company Data, Anli Research

Fig.5: Gross profit contribution from different segments in 1H20

Fig.6: Community VAS YoY growth in 1H20


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Fig.7: China property management companies 1H20 financial summary

Source: Company Data, Anli ResearchNote: Zhenro GFA growth is based on Dec-20



S-Enjoy Service Group (1755.HK)High earnings visibility name with the most re-rating upside in mid-cap space BUY

Stock Ticker Price Target Price (4 Sep 2020) Upside

1755.HK HK$28.3

HK$22.55 25.5%

Visible robust growth due to strong pipeline from parent companyThe earnings visibility of S-Enjoy is one of the highest in the PM space (58% FY19-21E CAGR) thanks to the highest reserve/revenue-bearing GFA ratio (1.35x vs 0.63x sector average). We estimate delivery from Seazen Group total 48mn sqm (80% of revenue-bearing GFA in 2019) and revenue from Seazen-delivered GFA would grow at 49% CAGR in FY20-21E. Also, the market worry about the Seazen’s chairman incident has removed as the transition of management is fairly successful and Seazen is re-accelerating landbanking in 1H20 after significant slowdown in 2019.

Showing organic growth ability in terms of third-party expansionS-Enjoy’s contracted / revenue-bearing GFA grew 60%/26% YoY to 167/71mn sqmin 1H20. While, new contracted GFA from third parties grew >3x than that in 1H19,contribution to newly added contracted GFA amounts to 67.8% (9.7mn sqm out of14.3mn sqm). We believe it is a good start for S-Enjoy to prove its third-partyexpansion ability to the market and gradually reducing its reliance on its parent,which we think is well-appreciated by the market.

Fast-growing community VAS with improving efficiencyS-Enjoy’s community VAS revenue grew at 86% CAGR in FY16-19 and continue topost strong growth of 95% to RMB185mn in 1H20 (significantly higher than 59%sector average). Also, the operation efficiency shows great improvement, revenueper revenue-bearing GFA jumped from RMB1.58/sqm in 1H19 to RMB2.6/sqm in1H20. With new services eg. community retail/household/catering services launchedin 1H20, we believe community VAS revenue would continue 90% CAGR inFY19-21E. Also, gross profit contribution from community VAS is gradually rising(22% of total GP in 1H20), comparable to 23% contribution from non-communityVAS. Larger share of this non-cyclical part can help alleviate market concerns of itsheavy reliance on related party and can help raise its valuation.

Room for re-rating, benchmarking Ever-Sunshine We believe S-Enjoy has potential to follow the path of valuation re-rating of Ever Sunshine. As they are similar in scale in terms of GFA, and their parent companies are also of similar scale. They were trading at close P/E since listing on end-2018, while Ever Sunshine starts to outperform since Mar 20. We attribute this outperformance to its strong third-party expansion capability and large share of non-cyclical businesses (property management and community VAS).

Initiate with BUYWe believe S-Enjoy is one of the fastest-growing name (48% CAGR in FY19-21E) among the sector on the back of strong pipeline from parent company and simultaneously expanding third-party GFA. While, community VAS is catching up to its peers in terms of efficiency and GP contribution. We believe S-Enjoy shares many similarities with Ever-Sunshine, gradual re-rating is likely if S-Enjoy could prove its organic growth ability. We initiate "BUY" rating for S-Enjoy Services with PT of HK$28.3, representing 30x FY21 P/E.

Key Risks:1) Share placement risk; 2) Slower-than-expected growth in GFA; 3) Deterioratingmargins due to increasing costs

52-wk rangeMarket capShrs outstanding

HK$5.78-27.65 HK$18,453mn

818.3mn

Price Performance


Based in 100 from Sep-19


Fig.8: We expect revenue-bearing GFA grow at 62.1% CAGR in FY19-21E

Fig.9: We expect non-community VAS and smart community services GP contribution would increase

Source: Company Data, Anli Research estimates

Fig.10: NP margin would increase thanks to higher contribution of non-community VAS


Fig.11: Contribution of contracted GFA from third-parties is likely to increase

Source: Company Data, Anli Research estimatesNote: 1H19/1H20 figures are half-year figures without annualized

Source: Company Data, Anli Research


Fig.13: We believe the valuation gap between Ever Sunshine and S-Enjoy can narrow if S-Enjoy can show its third-parties expansion ability


Fig.12: Community-VAS revenue per rev-bearing GFA jumped thanks to better operation efficiency



S-Enjoy Service Group (1755 HK): Financial Summary




Country Garden Services (6098.HK)Rapid-growing giant in the property management space

BUY

6098.HK HK$65.4

Stock Ticker Price Target Price (4 Sep 2020) Upside

HK$54.1 20.9%

Fast-growing despite huge scaleCountry Garden Services (CGS) is the largest listed PMC in the property management space in terms of contracted GFA. Although the huge size compared to peers, its growth momentum remains one of the highest in 1H20 results. Revenue grew 78% YoY (vs. 37% sector average) thanks to 47% YoY growth in revenue-bearing GFA and 96% YoY growth in community VAS. Also, its reverse/revenue-bearing GFA ratio remains very high at 1.33x (vs. 0.63x sector average), securing rapid growth in the future.

Community VAS will be the next growth driverAs the market leader in the sector, CGS gets stronger not only with the ability of maintaining fast GFA growth but also well positioned in leveraging its strength and huge platforms to brace for the next growth driver – VAS. CGS’s community VAS revenue jumped 96% in 1H20 YoY with comprehensive services. As management indicates that CGS is at the start of rapid growth and guides >40% CAGR in the next 2 years, asserting our view on the contribution from VAS business will be huge and potentially surpass PM revenue in three years. Recent acquisitions of new professions in community media and insurance enable them to penetrate into new business areas and create a large closed ecosystem within the community. We expect the GP contribution from community VAS to rise from 19% in FY19 to 26% in FY21.

Extension of city service under digitalizationCGS also builds an urban management platform with smart technology to enhance the efficiency of management and lower operating costs. We believe the company would be able to obtain more urban service projects as the platform facilitates the integration of urban public operations with public resource services, which not only benefit users, but also government authorities who could make use of it to assist decision-making. The strong brand name of Country Garden allows fast penetration in lower-tiers cities.

Initiate with BUYWe believe CGS could keep its growth momentum in basic property management services due to the high reserve/revenue bearing GFA. The strong operation efficiency in community VAS and expansion into new business areas could help CGS maintain strong growth in the future. Upside risks geared toward acceleration in M&A in 2H20 as CGS sits RMB9.9bn cash (+44% HoH) in 1H20. Therefore, we initiate “BUY” rating on Country Garden Services with PT $65.4 based on 40x FY21 P/E.

Key Risks:1) Slower-than-expected growth in GFA; 2) Deteriorating margins due to increasingcosts

Price Performance

52-wk rangeMarket capShrs outstanding

HK$21.85-56.5 HK$149,282mn

2,759.4mn


Based in 100 from Sep-19



Fig.14: High reserve/rev-bearing GFA ratio secure 37% CAGR of revenue-bearing GFA in FY19-21E


Fig.15: We believe CGS's gross profit from community VAS would rise to 26% in FY21E

Source: Company Data, Anli Research estimates Source: Company Data, Anli Research estimates

Fig.16: We expect CGS's net margin would steadily rise in the coming years

Fig.17: Revenue-bearing GFA contribution from third-party is likely to increase


Source: Company Data, Anli Research Note: Top 10 PMCs are ranked by market cap

Fig.18: CGS's gross margin of community VAS in 1H20 is the highest among the top 10 PMCs


Country Garden Services (6098 HK): Financial Summary



Important legal disclosures


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china property management...2020/09/04 · 4 sep, 2020 china property management doris wong...

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