bullish

China Property Management - Sector Deep Dive and Evaluation Framework

814 Views23 Jun 2020 08:34
SUMMARY

The China Property Management Sector is loved by investors for several reasons. The common thesis for investing in this space is :

  • Visible and High growth for a few years: For most companies, profit growth is more than 30% CAGR over 3 years.
  • Asset Light Business Models: ROE's over 20%.
  • M&A catalysts: Most companies have just IPOed. They are cash-rich and can use their balance sheet to make favorable acquisitions.
  • Strong Working Capital, Cash Flow, and Balance sheets.

The flip side is that a lot of these names have rallied (as you can see in the section Great Shareholder Returns) and have extremely high valuations. The average 1-year return for the names we look at in the sector has been 107%. We believe there is still upside in the universe of stocks to choose from in this space. In this insight, we will cover most of the HK listed names in the table below:

CompanyTickerPriceMkt cap (US$m)PER 2019 (x)PER FY20 (x)PER FY21 (x)PER FY22 (x)3-Yr EPS CAGR (%)PEG

Country Garden

6098 HK

37.25 13,234 54.2 41.6 30.6 22.9 33.2 1.3

A-Living Servi-H

3319 HK

43.15 7,423 42.8 30.4 23.4 18.6 32.0 0.9

Poly Property -H

6049 HK

82.65 5,901 62.3 55.7 40.4 29.4 28.4 2.0

Greentown Service

2869 HK

9.80 4,068 52.6 41.0 31.4 24.6 28.8 1.4

China Overseas

2669 HK

8.26 3,503 50.5 39.1 30.6 24.5 27.2 1.4

Ever Sunshine Life

1778 HK

12.74 2,746 79.7 49.0 32.1 22.1 53.4 0.9

S-Enjoy Service

1755 HK

21.40 2,259 57.4 38.1 26.6 19.4 43.6 0.9

Central China

9983 HK

9.27 1,489 43.0 27.9 18.4 13.6 42.0 1.2

Powerlong Commercial

9909 HK

17.56 1,408 36.4 34.5 23.8 17.6 27.5 1.3

Times Neighborhood

9928 HK

10.42 1,222 73.1 38.3 22.4 15.0 69.5 0.6

Sichuan Languang

2606 HK

55.80 1,282 16.4 15.2 11.5 8.7 23.4 0.6

Aoyuan Healthy Life

3662 HK

8.56 802 31.7 23.9 17.2 13.4 33.2 0.7

Colour Life Services

1778 HK

3.92 720 9.8 8.8 8.0 7.7 8.4 1.0

Binjiang Service

3316 HK

12.98 463 26.9 20.4 15.6 12.6 28.8 0.7
Adjusted Sector Avg* 39.130.521.816.733.30.9

source: Bloomberg

What's Original?

Most reports you will see on the sell-side will involve single stocks or initiating coverages on 4-5 names followed by a thesis on buying or selling them. What we've done here is used a compendium of 14 of the best names listed on the HKex and contrast them in a framework that is easy to understand. We've weighted each of these nine criteria equally. Readers may elect to weight each criterion differently but the essence of using this framework is that the more criteria that are met the more investible the stock is.

Nine Criteria Framework

  1. Improving contracted GFA to GFA under management trend + supportive parent.
  2. Third-party Growth Potential.
  3. Listco balance sheet strength.
  4. Parent balance sheet strength.
  5. Margin improvement potential.
  6. Incentivized management.
  7. Reasonable valuations.
  8. No Red flags.
  9. Shareholder friendly actions like buybacks/dividends.

Putting these 9 points into a matrix for the stocks we get a table that ranks them. The companies in bold, are in our opinion the best names in the space.

Company Ticker123456789Total
Country Garden S6098 HK 11111 1 1 7
A-Living Servi-H3319 HK 1111 1117
Poly Property -H6049 HK 111 11 1 6
Greentown Service2869 HK 1111 1 1 6
China Overseas P2669 HK 1 111 1 5
Ever Sunshine Li1995 HK 1111 111 7
S-Enjoy Service1755 HK 1 11 11 16
Central China Ne9983 HK 1111 1 1 6
Powerlong Commer9909 HK 1 11 1 1 16
Times Neighborho9928 HK 11111 11 7
Sichuan Languang2606 HK 1111111 18
Aoyuan Healthy L3662 HK 111 111 6
Colour Life Serv1778 HK 1 1 1 3
Binjiang Service3316 HK 1 11 11117

Based on the matrix if one adopts a mid-cap basket approach Languang Justbon Services (2606 HK), Times Neighborhood (9928 HK), and Ever Sunshine Lifestyle Services (1995 HK) are good names to own. A large-cap portfolio could consist of stocks like A-Living Services (3319 HK) and Country Garden Services Hold (6098 HK) with a greater weightage to the former.

For funds that make single stock purchases or having a small-cap inclination Binjiang Service Group (3316 HK) is an apt name to look at else, it also could be included in a basket of small and mid-caps.

In this insight, we will breakdown this nine criteria framework in detail.

Key Sections in this Insight

  • Why Invest in China Property Management Companies (PMC's)?
  • The PMC Business Model
  • A Brief Summary of the Names
  • Shareholder Returns in the Sector
  • The nine criteria framework in detail
  • More Opportunities and New Deals in the Space
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