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Asian Insights SparX China Property Management Sector Refer to important disclosures at the end of this report DBS Group Research . Equity 10 Jul 2019 Catch the rising stars HSI: 28,116 • Stellar outlook supported by organic growth and accelerating market consolidation • Higher sector valuations and rising focus on recurring ANALYST Jason LAM +852 36684179 [email protected] income for developers should attract more new listings Danielle WANG CFA, +852 36684176 [email protected] • CGS (6098 HK) remains as our sector top pick; potential Ken He CFA, +86 21 3896 8221 [email protected] newcomers with decent scale or unique exposure may be worth a look Defensive sector with strong visible organic growth outlook plus Recommendation & valuations market share consolidation. We identified the property management sector as a Recurring, Innovative-driven, Cash-rich and High growth T arget Mk t PE (R.I.C.H) industry with strong defensiveness and robust growth Company Name Price Price Rec Cap 20F potential. We estimate the industry’s current market size of HK$ HK$ US$m x Country Garden Services* >Rmb450bn is set to grow at a decent CAGR of >5% up to 2030, 17.98 20.18 BUY 6,146 26.0 which points to a doubling in market size within the next 15 years. (6098 HK) Greentown Ser.Gp.* Key listcos are expected to achieve 36% 2-year earning CAGR 6.34 7.67 BUY 2,256 21.3 through market share gain. (2869 HK) Colour Life Services Gp.* 5.25 6.77 BUY 893 8.2 Country Garden Services (CGS) remains as sector top pick. Our (1778 HK) strategy of picking stocks within a defensive sector is to identify the A-Living Services 'H'* 14.08 17.91 BUY 2,404 13.0 name with the strongest growth visibility coupled with superior (3319 HK) growth potential. As shown in our updated in-house scorecard, CGS continues to offer the highest growth potential with superior Source: Thomson Reuters, *DBS Hong Kong Limited (DBS HK) earnings visibility and is a likely long-term outperformer in the sector. Watch for potential new listings in the sector. Currently trading at 18x/14x FY19/FY20F ex-cash PE, the sector enjoys higher valuations compared to developers. Meanwhile, incubating recurring income streams has become an increasingly important agenda for developers, with property management as a natural point of extension. We therefore expect more spinoffs, new listings, and major M&A in this sector. We believe candidates with the following characteristics would attract investor interest: (1) scalable players with reputable brand names; (2) companies offering sizable non- residential property exposure; and/or (3) regional players with the ability to maximise operating efficiency. ed- JS/ sa- CS / AH Asian Insights SparX China Property Management Sector The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination. Table of Contents Investment summary 3 R.I.C.H Industry in Transformation 3 Trading at reasonable valuations 4 The property management business 6 Scalable market with decent growth potential 6 Major channels of growth for leading players 8 Stable margin outlook in the next 2-3 years with upside from supportive policies 10 The emergence of value-added services (VAS) 12 Frequently raised concerns on the sector 16 Concern 1: Labour cost 16 Concern 2: Pace of conversion of contracted GFA 17 Concern 3: Management fee collection rate 17 Concern 4: Connected transactions 18 In-house scorecard 19 Key attributes for outperformance 19 Property management services 19 Value-added services. 24 Valuations and financial comparisons 27 Unlisted names: Which are hidden gems? 30 Appendix 1: Peers comparison and PE & PB charts 38 Appendix 2: Charging methods – Lump-sum vs Commission-based 41 Charging methods – Lump-sum vs Commission-based 41 Appendix 3: Incentive schemes in place 42 Note: Prices used as of 9 Jul 2019 Page 2 Asian Insights SparX China Property Management Sector Investment summary R.I.C.H Industry in Transformation attractive alternative for investors seeking exposure to companies with a defensive business profile. An industry in transformation… On the back of rapid growth in the property development sector in the past 15 years, there I - Innovation and technology to offer additional growth is now c.12.1bn sm of completed residential and non- potential. Property management companies can use residential properties in China. But, with the absence of good technology and innovation to optimise operational efficiencies. quality property management services, the state of the Through the use of cameras and other types of automation, properties (and thus values) have deteriorated at a much faster property managers can reduce their high exposure to labour pace compared to cities globally. Driven by the increasing costs, which has been growing rapidly and even exceeding proportion of properties within household wealth as a result of management fee growth. higher property prices, together with growing evidence that property management services can offer additional value, Technology offers an opportunity for property managers to property owners are now increasingly willing to spend on better monetise their existing resources derived from managing property management services as a way to preserve property communities. With their proximity to residential/commercial values. According to data compiled by Noah Research, real communities, in addition to offering basic property estate as an asset class represents c.65% of private household management services, property managers are well positioned asset allocation in China (vs. 49%/34% in USA/Japan). This, to offer complimentary value-adding services (VAS) to their coupled with an increasing emphasis on living standards, is managed communities. This is further facilitated by the now reshaping the property management industry from increasing use of online platforms/applications by property provision of services with limited pricing power to a value-add managers to efficiently distribute these services to their service with room to increase management fee and managed communities. Unlike basic property management profitability. business, VAS commands higher profitability with decent growth potential. This enables property managers to establish …with policy heading towards liberalisation. Against the a more diversified income stream and enhance overall backdrop of China’s target to meet the population’s ever- profitability. growing need of a better life that was set during the 19th National People’s Congress held in late 2017, the property China Property Management Sector structure management sector is now operating under an increasingly supportive policy environment with removal of entry barriers, V alue-added services gradual step-ups in fee guidance, and progressive handover of • Higher profitability in nature SOE-managed facilities to privately-owned property • Largely categorised into community management services providers. Compared with other (for residents and property owners) and non-property owner services emerging sectors like education and healthcare which are increasingly regulated by the government, the property Online platform/Self-owned app management sector is seemingly faced with lower policy risks. • Enhance operating efficiency for both residents and property manager R - Recurring in nature. A key feature of this sector is its asset- • Consolidates online and offline light and long-term recurring business model. On one hand, resources property management services are engaged via service Property Management services contracts with limited amount of assets required for • Sticky in nature, highly recurring operations. On the other hand, typical property management income but low in profitability service contracts last for 3-5 years upon the formation of a • Security, gardening, cleaning, etc property owners’ association (or no definitive expiry date for Source: DBS HK projects where property owners’ associations have yet to be formed) with a pre-determined fixed management fee to be C - Cash-rich. Most of the listed property managers are in net received periodically. According to China Index Academy (CIA), cash position thanks to their asset-light business models. the average contract renewal rate for Top 100 property Together with the recurring income nature of the sector, managers has been a decent c.98% for the past five years, property managers’ performances are less sensitive to macro- alongside a gradually improving cash collection ratio that is economic trends or monetary policies. Their cash-rich position consistently maintained at c.94% over the past four years. (together with support from the capital market for listed These point to the strong recurring income characteristic of this players) enables them to embark on M&As to grow at a faster industry. Coupled with a scalable market size of c.Rmb450bn pace and/or promote efficiency and profitability through that is set to grow at >5% CAGR up to 2030, this sector is an investments into technology and innovation. Page 3 Asian Insights SparX China Property Management Sector China property management companies listed on the Results of in-house scorecard, 2018 HKSE Property Net % of IPO Cash management Year proceeds proceeds raised for serv ices V A S Ov erall of raised planned M&A Companies (avg score) (avg score) score HK IPO Listing (Rmb mn) for M&A (Rmb mn) CGS 1 2 3 Colour Life 2014 710.0 60% 426.0 GTS 3 1 4 Zhong Ao Home 2015 238.2 60% 142.9 Colour Life 3 3 6 China Overseas Property 2015 N/A N/A N/A A-Living 2 4 6 Greentown Services 2016 1,265.8 38% 481.0 Clifford Modern Living 2016 46.4 30% 13.9 Note: The lower the score, the better the company’s attribute within Riverine China 2017 104.9 58% 60.5 the specific category.
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