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
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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.
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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. A-Living 2018 3,187.8 65% 2,072.1 Ranking updated in July 2019 mostly based on 2018 numbers. Country Garden Services 2018 N/A N/A N/A Source: DBS HK S-Enjoy 2018 538.4 60% 323.0 Ever Sunshine Lifestyle Services 2018 595.2 39% 232.1 Trading at reasonable valuations Kaisa Property 2018 288.9 50% 144.5 Binjiang Services 2019 343.0 35% 120.1 Further re-rating to be supported by favourable fundamentals. The property management sector underwent a correction Aoyuan Healthy Life Group 2019 573.2 62% 355.4 triggered by market concerns regarding potential impact from Source: Companies, DBS HK the new social security payment arrangement, coupled with adverse market sentiment as a result of a slowdown in the H - High growth. In 2018, the market share of the top 100 property development sector. The sector is currently trading at property managers was only c.38.9% according to CIA. This 21x FY19F PE and 15x FY20F PE (simple-average), versus c.30x implies substantial growth opportunities through market 1-year forward PE back in Jul-18. While the sector has re-rated consolidation. Weighted average 2-year earnings CAGR of since our initiation report published in Feb-19, we believe there listed property managers we track stands at 36%, as compared is room for further upside as the market continues to recognise with 30% for developers and 12% of HSI constituents. the sector’s superior defensiveness and growth potential. We therefore believe there is good opportunity for investors to gain or increase exposure to this sector to ride on the Country Garden Services (CGS) had the best scores based on expanding property market in China. our in-house scorecard, followed by Greentown Services (GTS)
We have identified 9 key operational and financial attributes Ex-cash forward PE multiple better reflects valuations. In light for property management services and 5 key factors for value- of the typical cash-rich positions of property management added services to gauge key players’ overall strengths and stocks, we have opted to use ex-cash forward PE to assess competitiveness in this sector. current valuations. Under this valuation metric, the sector now
trades at a simple-average 18x/14x FY19F/FY20F ex-cash PE. CGS ranked first under our in-house scorecard for its strong We believe the sector is not as expensive as perceived. capability in the property management space. The company has the highest organic growth potential (sizeable reserved Performance of property management companies vs HSI GFA for future conversion) and strong parent support. GTS was (6 months) second overall given its superior track record in VAS (led by its strong presence in community VAS and huge potential from its Rebased Jan 2019 (6-mth) largely untapped high-quality projects), coupled with its strong 150 reputation in the property management business. 140 130 Colour Life recorded satisfactory scores in VAS operations 120 thanks to its well-established online platform, but its ranking 110 on an overall basis was dragged by its comparatively weaker 100 growth potential compared to peers in the property 90 management business despite its scalable presence within this 80 business segment. A-Living had adequate scores in terms of 70 attributes in property management led by its high growth
potential derived from its M&A-led growth strategy, but lagged
Jan-19
Jun-19
Feb-19
Apr-19 Mar-19 on an overall basis given its sizeable dependence on property May-19 sales-related VAS business, which is less certain in nature. Property Management Sector Hang Seng Index
Source: Bloomberg Finance L.P., DBS HK
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Unlisted property management arms of CR Land, Shimao, Ex-cash PE multiples Central China, Guangzhou R&F and Shenzhen Investments worth a look into for IPO potential. We have also conducted an Colour analysis of the unlisted property management subsidiaries of V aluation GTS Life CGS A -Liv ing A v erage HK-listed property developers in response to interest from Forward PE* investors. During the process, we identified a list of property FY19E 27.3 10.0 34.0 16.0 21.8 management arms that may come into the IPO pipeline in the FY20E 21.2 7.8 25.9 13.0 17.0 near future. Taking into account their respective scale and exposure, CR Land, Shimao Property, Central China, Ex-cash forward PE* FY19E 23.7 9.8 28.4 11.3 18.3 Guangzhou R&F and Shenzhen Investments may warrant more investor attention. KWG, Yuexiu, China SCE and LVGEM also FY20E 17.7 7.0 20.4 9.1 13.5 possess favourable characteristics that may attract investor *Based on closing prices at 9 Jul 2019 interest. Source: Bloomberg Finance L.P., DBS HK
CGS remains as our top pick in the sector. In terms of individual stocks, we believe comparative valuations among our covered names have become fairer since our initiation report. Rather than driven by mispricing opportunities, we believe future share price and valuation re-rating will depend more on the overall re-rating of the sector. As such, we take the view that choosing stocks with the superior fundamentals should continue to be the best stock selection strategy for this sector. In this regard, CGS remains as our top pick in the sector, as identified under our in-house scorecard. While valuation appears rich when compared to peers at first glance, we believe its premium is justified as it has the highest growth potential and superior earnings visibility, which are desired qualities when picking defensive stocks.
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The property management business GFA sold in the past 15 years
m sm Scalable market with decent growth potential 53% 2,000 46% 60% 26% 1% Scalable business in both residential and non-residential 19% 17% 22% 40% 8% 1,500 5% 7% 20% markets…… Taking 15 years of completed gross floor area 1% -8% 0% (GFA) as the current size of the property management market, 9% 10% residential properties available for management as at end-2018 1,000 -20% -19% is a sizeable 9.3bn sm, with c.2.8bn sm for non-residential -40% 500 -60% properties (offices, retail malls and shops, warehouses, etc). -80% This implies that there is 12.1bn sm of GFA available for 0 -100% management. Based on an average management fee of
c.Rmb2.3 psm/mth and c.Rmb7.0psm/mth for residential and
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017 2018 non-residential properties respectively as per data compiled by Non-residential GFA sold (LHS) CIA, the current market size of the property management Residential GFA sold (LHS) sector is estimated at >Rmb450bn. y-o-y growth (RHS)
GFA completed in the past 15 years Source: CEIC, DBS HK
m sm Residential properties dominates the equation. Residential 1,200 properties form the predominant type of properties managed 1,000 by property managers in China as 1) majority of properties sold and completed are residential properties (c.85-90% of annual 800 GFA sold); and 2) most property managers were founded by 600 property developers to manage projects sold by them, which are mostly residential properties. There is now an emerging 400 trend for property managers to diversify into other types of 200 properties.
0
Proportion of types of properties managed by Top 100
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016 2017 2018 property management players in 2018 (by revenue) Residential GFA completed Rest of GFA completed
Public Source: CEIC, DBS HK properties 2% Offices Commercial 20% ……. with sustainable growth potential. As at end-18, sold but Industrial 14% parks uncompleted residential GFA stood at c.3.8bn sm. In terms of 7% future GFA sales, our in-house forecast expects residential GFA sold to remain stable at c.1.2bn sm per annum. This points to a Schools sustainable CAGR of >5% for the overall market up to 2030. 3%
Residential 46% Others 5% Hospitals 3%
Source: CIA, DBS HK
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An overlooked part of the picture – schools, hospitals and Property represents a meaningful portion of household wealth; public properties. Given the significant scale of residential and Value creation from quality property management services to non-residential (commercial and office) properties, other types support future management fee growth. Property is a key asset of projects comparatively smaller in scale have been left out class that represents a meaningful portion of household wealth. from the picture, such as schools, hospitals and public This is increasingly more so alongside rapid growth in property properties. Based on our estimates, existing GFA for completed prices over the past few years. According to data compiled by schools and hospitals stand at c.1.6bn sm and 0.4bn sm Noah Research, real estate as an asset class represents c.65% of respectively. Applying the corresponding average management private household asset allocation in China. Therefore, fees of Rmb3.6psm/mth and Rmb6.8psm/mth as per CIA, the preserving property value is important to homeowners. current market size of this largely untapped segment amounts According to CIA, secondary home prices and annual rental to a decent c.Rmb100bn. Cash collection ratio for these income of properties managed by the Top 100 property properties are generally better given their consolidated managers have been consistently higher compared to other ownership structures. nearby property projects over the past 5 years, with the former posted an 8% difference in 2018. This points to the evident Average management fee by property type in 2018 value added by property management services to property values, and this may imply there is room for quality property Fee collection rate managers to command higher property management fees. 100% Industrial parks Hospitals 99% Residential ASP in China 98% Public Schools Rmb psm 97% properties Offices 9,000 25% 96% 8,000 21% 18% 17% 20% 95% 7,000 Others 15% 94% 6,000 15% 11% 12% 93% 5,000 Commercial 6% 8% 10% 92% Residential 4,000 91% 3,000 8% 9% 5% 7% 90% 2,000 6% 4% 4% 0% 0 2 4 6 8 1,000 Rmb/sm/month 1% 0 0% -5%
Source: CIA, DBS HK
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017 2018
CN residential ASP (LHS) y-o-y growth (RHS)
Market share of top 100 property management players Source: CEIC, DBS HK
One of the few sectors with favourable policies. Contrary to 45% most other property-related sectors, the property management 40% sector is one of the few that is embraced with supportive 35% policies. On one hand, the government is putting in effort to 30% push forward market reforms and liberalise the sector. The 25% 27.5% separation of “Three supplies and property management (三供 21.4% 20% 19.3% 一業)” services from SOE companies to private company 20.7% specialists is a case in point. On the other hand, policy 15% 13.3% relaxation by local governments on price guidance for initial 10% 11.4% property management contracts are increasingly evident. 5% 10.2% 11.06% 11.35% 4.9% 6.2% 7.6% Shenzhen and Dongguan are currently proposing to raise the 0% price guidance on property management services for 2013 2014 2015 2016 2017 2018 preliminary service contracts, while Jiangsu province removed Top10 market share Top11-100 market share original discounts on property management fees for vacant units. Foshan has also raised the maximum property Source: CIA, DBS HK management fee allowed on preliminary service contracts and introduced an automatic price adjustment mechanism on the fee ceiling. We expect more supportive policies to stimulate the development of the sector.
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Major channels of growth for leading players New projects from third party developers – the choice for property managers lacking developer support. In the case of Fragmented market and gradual acceleration in market share property managers with none or negligible parent/related consolidation. Led by increased capital market activities within developer support, the battlefield rests on tenders for new the sector and developers’ intention to expand their property projects by third party developers that do not have a property management arms, the pace of consolidation in the property management arm (normally smaller developers). Previously, management market has picked up noticeably in recent years competition at this end was comparatively lower as most with market share of the Top 100 property managers having property managers (particularly scalable ones) focused mostly more than doubled during the past five years. Yet, the sector on taking up contracts from their parents. Now, with an remains highly fragmented with the Top 100 property increased focus on growth, these reputable property managers managers taking only c.38.9% market share in 2018 according that were previously out of this segment are now tapping into to CIA. We believe the sector is still at an early stage of this market. consolidation and expect the pace to pick up upon 1) continued consolidation on the property development side; 2) Rising interest for projects from secondary market. Another gradual deployment of recently raised capital by acquiring source that has received less market interest in the past is other property managers; and 3) property managers expanding management service contracts for existing projects in the to third party projects. secondary market, where property owners’ associations are
formed and are looking to switch to another property New projects from parent and related developers – the manager. Previously, there was less focus on these projects as traditional channel. In the case of properties under 1) size of the market was comparatively small – majority of development (new projects), developers are required to invite existing properties were relatively young (c.42% of our tenders and award property projects to the winning property estimate of 12.1bn sm of properties for management within manager according to a predetermined set of criteria. the sector were completed over the past 5 years) and majority Naturally, developers would usually award projects to their have yet to form a property owner association (or recently respective property management arms/strategic partners. This formed but contract has not expired); and 2) these projects has been the traditional and major route for most property require more care when due diligence and inspections are managers (particularly those with a large-scale parent) to carried out – as wear and tear of facilities within these projects secure projects for growth. Together with ongoing may affect a property manager’s profitability. As the property consolidation taking place in the property development sales market enters into a more matured stage and sales market, property managers with a strong developer growth moderates, the proportion of GFA available for background are in an increasingly favourable position. management in the secondary market will become increasingly
Market share of Top 10 property developers by GFA sold meaningful. There is now increasing interest from a fair number of property managers that are able to scale up to tap onto this segment for growth. m sm 2,000 30% 24% 25% 1,500 19% 20% 15% 13% 1,000 10%11% 15% 8% 9% 6% 10% 500 5% 5%
0 0%
2010
2011
2012
2013
2014
2015
2016
2017
2018 5M19 Rest (LHS) Top 10 developers (LHS) Market share (RHS)
Source: CRIC, CEIC, DBS HK
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M&A in property manager space – an increasingly popular growth option. Given the inherent labour-intensive nature of the industry, it is often difficult for property managers to expand aggressively through clinching contracts to manage new projects. Coupled with increasing interest from the capital market and the sector’s naturally asset-light business model, more property managers are exploring expansion opportunities through acquiring or merging with existing players. The trend has become increasingly evident with a growing number of property managers tapping into the capital market for funds to carry out M&As (e.g. Colour Life, A-Living). But, the quality of property managers up-for-sale have become increasingly scarce and expensive, not to mention the potential risks and complexities (e.g. corporate culture conflicts, mixed project qualities) involved in such deals. As such, a number of property managers (e.g. GTS, Colour Life) have now turned more cautious in growing through this channel.
Consideration spent on M&As by large HK-listed property managers
Rmb mn 3,500
3,000
2,500
2,000
1,500
1,000
500
0 2015 2016 2017 2018
Source: Companies, DBS HK
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Stable margin outlook in the next 2-3 years with upside Higher margin new projects could lift profit margins. Profit from supportive policies margin on property management contracts are typically the highest at the commencement stage. Over time, profitability is Sector’s profitability is thin. Known for its labour-intensive likely to deteriorate from lower efficiency as a result of gradual nature, over 50% of operating cost for the Top 100 property wear and tear of surveillance equipment, increased cost managers comprises of labour cost, which has been increasing incurred on repair and maintenance of commonly shared at 8-11% p.a. over the past few years. Meanwhile, Top 100 facilities, etc, not to mention the increasing labour costs. After players’ net margin from basic property management services several years of accelerated growth in the property averaged a mere 5-6% in the past three years. This has created development market, completed but unsold residential GFA a major concern among investors on property managers’ ability pending delivery over the next few years stands at c.3.8bn sm to maintain profit margins, as it is often difficult for property as at end-18, representing a sizable c.32% of our estimated managers to secure property management fee hikes in their total GFA for management. Conversion of GFA under- existing managed communities to offset the additional cost of development over the next 2-3 years should continue to providing this service. provide good support for profit margins. Cost breakdown of Top 100 property management players in 2018 Proportion of accumulated uncompleted GFA
bn sm Security 32% 4% 18 35% Cleaning 16 26% 30% 8% Admin 14 20% 25% 3% 12 16% 14% 10 13% 20% 10% Greening 8 15% Daily Labour 2% 6 58% operations 10% 10% 4 2 5% Others 0 0% 14% 2012 2013 2014 2015 2016 2017 2018 Insurance Accumulated undelivered GFA (LHS) 1% Total GFA for management (LHS) % of uncompleted GFA (RHS)
Source: CIA, DBS HK Source: CIA, DBS HK
Market liberalisation underway - possibly on pricing side. Price Top 100 players’ average net margin from property guidance is generally set by local regulators for preliminary management services property management contracts entered into between developers and property managers depending on the services 6.5% to be provided on property projects. There are signs of relaxation at this end. Jiangsu province announced the removal of the 30% discount on property management fees on vacant 6.0% units. Shenzhen has also proposed to raise its price guidance 6.0% on preliminary contracts. Foshan raised the ceiling of chargeable property management fees from Rmb2.47psm/mth 5.6% to Rmb2.70psm/mth and introduced an automatic price 5.5% adjustment mechanism to lift the management fee ceiling 5.5% 5.4% when average wage growth in the city meets the 30% threshold versus 2017’s wage level. Overall policy environment appears to be supportive in our view. We believe there could be further relaxation on the pricing side going forward, which 5.0% gives room to property managers to absorb rising labour costs. 2015 2016 2017 2018 Source: CIA, DBS HK
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Optimise operating efficiency - Scale expansion at locations Operating cost ratio versus average GFA of projects with existing presence for economies of scale. A natural way managed by Top 100 players for property managers to enhance operational efficiency and economies of scale is to expand within existing business mn sm locations. This trend has become increasingly evident since 40 80.0% 78.8% 77.7% 76.4% 85% 2015, with average number of cities in which these players 35 37 80% have a presence remaining static while increasing the number 30 of managed projects within these cities. Additionally, larger 25 27 32 75% sized property projects generally offer more room for cost 20 24 optimisation. The operating cost ratio for Top 100 property 15 70% managers has declined from 80% in 2015 to 76.4% in 2018 10 according to CIA. 65% 5 Average no. of projects per city and cities entered into 0 60% by Top 100 property managers 2015 2016 2017 2018 Avg GFA under mgmt for Top 100 (RHS) No. of cities entered Avg no. of project per city Top 100 operating cost ratio (%) (LHS) 6.64 35 6.35 7 5.71 5.93 Source: CIA, DBS HK 30 6 29 Optimise operating efficiency - Investment in technology and 25 3.82 3.92 28 28 5 27 digitisation to reduce dependence on labour. Another trend for 20 4 property managers to reduce their dependence on labour is 15 22 24 3 rising investments on technology to substitute labour and 10 2 enhance efficiency. While one-off costs are comparatively high, 5 1 equipment (e.g. surveillance cameras) in general offer higher operational efficiency and reduces labour costs. 0 0
2013 2014 2015 2016 2017 2018 Optimise operating efficiency - Outsourcing of non-core yet No. of cities entered (LHS) labour-intensive services. As certain functions of basic property Avg no. of project per city (RHS) management services are comparatively non-core in nature but Source: CIA, DBS HK nonetheless labour intensive, we are seeing an increasing proportion of these services outsourced to third party service providers. Of this, cleaning and greening in general are the most frequently outsourced services among Top 100 property Average number and size of projects managed by Top managers. 100 property managers
Proportion of basic management services outsourced by GFA ('000 sm) No. of Project Top 100 property managers 250 250 192 178 200 166 200 2018 60.4% 43.3% 24.9% 37.0% 154 194 178 150 164 150 153 2017 60.3% 43.1% 24.7% 36.8% 100 100
50 50 2016 59.2% 42.3% 24.0% 35.2% 0 0 2015 2016 2017 2018 Average size per project managed by Top 100 (LHS) 2015 38.2% 25.7%19.8%24.1% Average no. of project managed by Top 100 (RHS)
0% 50% 100% 150% Source: CIA, DBS HK Cleaning Greening Security Repair and maintenance
Source: CIA, DBS HK
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The emergence of value-added services (VAS) Increasingly meaningful contribution from VAS. Aside from offering basic property management services, property Natural extension from basic property management services. managers are starting to look out for opportunities to monetise VAS are largely categorised according to the target customer in their resources and expertise through the offering of more question: non-property owners and property owners (referred value-added services. Given low marginal costs and decent to as community VAS). For the former, VAS are generally profitability from these services, earnings contribution from this related to property sales and utilise property managers’ business segment has been increasing steadily in recent years. expertise that were acquired throughout their provision of At the same time, overall profit margins for property managers property management services. Such services include presales have also gradually risen. facilitation (operation of sales offices, agency services, training of sales agents etc), inventory sales (sales of remaining unsold Revenue of Top 100 property managers by service type carpark/unit inventories), together with other non-community related services. For the latter, such services are a natural 100% extension to property management relating to the daily needs 90% 16.7% 17.3% 18.2% 19.5% of the communities, such as housekeeping, repair and 80% maintenance, child care, bulk purchases, etc. 70% Examples of value-added services 60% 50% 40% 83.3% 82.7% 81.8% 80.5% • Consultancy services 30% Services to • Sales assistance services for property 20% non- property developers and other businesses ow ners • Engineering services (e.g. installation 10% services, etc) 0% • Online/on-site advertisements 2015 2016 2017 2018 Basic mgmt services value-added services
Source: CIA, DBS HK
• Repair and maintenance services Services to • Property rental/brokerage agency services residential/ Net profit of Top 100 property managers by service type commercial • Education-related services communities • Retirement care services • Medical services 100% 90% 31.1% 80% 39.2% 41.7% 44.3% 70% Source: DBS HK 60% Decent profit margins. In the case of VAS to non-property 50% owners, most services offered require minimal additional 40% 68.9% resources (mostly consultancy-based, training-related, and 30% 60.8% 58.3% 55.7% utilise resources that are already available from its existing 20% operations, such as labour). Meanwhile, in the case of VAS to 10% property owners, property managers mostly act as agents who 0% refer demands from residents (e.g. maintenance requests) to 2015 2016 2017 2018 corresponding independent third-party service providers in Basic mgmt services value-added services return for a specific percentage of commission based on the transacted amount. As such, both types of services generally Source: CIA, DBS HK yield higher profit margins compared to basic property management services.
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Net margin of Top 100 property managers by service Revenue breakdown of community VAS of Top 100 type property managers in 2018
Housekeeping 20% 18.5% 17.7% Other services 18% 16.6% services 8% 11% Financing Retirement 16% 13.5% Electronic 10% services 14% services 5% 12% 14% Education 10% services 8% 5% 6.0% 5.4% 5.5% 5.6% 6% Property brokerage Household 4% 18% services 2% Space 4% utilisation 0% Auto-related 22% 2015 2016 2017 2018 services Property management Value-added services 3%
Source: CIA, DBS HK Source: CIA, DBS HK
Accelerating growth in community VAS – an area with strong Online platform to facilitate the provision of VAS to growth potential. While VAS to non-property owners was differentiate larger players from the crowd. Along with sizeable in terms of contribution to total VAS, revenue increased acceptance and adoption of technology in China, a contribution from community VAS has increased noticeably. number of property managers have started to establish their We believe this is mainly driven by the complimentary nature of own online platforms in China to 1) consolidate on- and off- community VAS, which is helping property managers line resources for better operational efficiency; and 2) establish differentiate themselves from other peers, together with a direct communication channel between property owners and favourable profitability and strong growth potential. We see representatives of property managers for better user community VAS as an efficient way for property managers to experience. This trend is particularly evident for larger property take advantage of their existing access to thousands of families managers that generally have more resources. Most property within their managed projects. Currently, standard services managers are in the early stages of establishing a platform and such as space utilisation, electronic services and property are at the initial phase to promote user engagement. For brokerage are the principal services offered by property example, Colour Life has put online platform development as managers (55% in 2018, 62% in 2016). There is plenty more one of its key growth strategies. This serves as another room for property managers to explore further complementary potential channel for communities under management to services to maximise earnings potential of their managed engage more VAS going forward. communities. Percentage of Top 100 property managers with online Revenue of Top 100 players from VAS by service type platform/applications in 2017
100% 95% 100% 100% 16% 18% 18% 90% 80% 77% 20% 15% 14% 80% 60% 14% 70% 16% 15% 60% 40% 49% 50% 48% 52% 54% 20% 40% 30% 0% 2016 2017 2018 20% Others 10% Consulting services Engineering services 0% Top 10 Top 11-30 Top 30-50 Top 51-100 Community value-added services
Source: CIA, DBS HK Source: CIA, DBS HK
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Quality community VAS to enhance property manager’s brand China property management operational flow name and facilitate expansion in the property management business. Offering quality community VAS would increase Provision of basic residents/property owners’ satisfaction and help to improve the property management property manager’s reputation. This could in turn contribute to services better project retention rates as well as support property manager’s expansion to other property projects. While most of Establishment of online Fulfill customer demand the property managers are still at the initial stages of exploring platform/self-owned and enhance app for efficiency various types of community VAS, earnings contribution from satisfaction this segment will be an important growth driver in the future. enhancement
A virtuous cycle between offering VAS and basic property management services
Distribute/provide value-added services as Consolidation of online deemed fit with and offline resources Enhance satisfaction & consolidated demand via online platform project retention rate Source: DBS HK
V alue-added service
Basic property management services
Source: CIA, DBS HK
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Value -added services provided by major HK-listed property management companies
Colour Life Greentown Services A-Living Country Garden Services
Community • Rental of residential and • Community products and • Resident Services - • Home Living Services - Value- retail units (introduction services - online and property maintenance Mainly acts as an agent added of rental units within self- offline sale of high- and repair, housekeeping and receives commission services managed communities to quality agricultural and and cleaning, decoration income through third parties) and sales other daily products and turnkey furnishing, matching community assistance to third party purchase assistance and demands with third party developers • Home living services - travel services suppliers in the offering cleaning, repair and of purchase assistance, • Carpark space sales maintenance services for • Property value housekeeping, turnkey
property owners/residents management services - furnishing and move-in • Commission fees from residential property lease services. Also offers transactions made • Property asset services greening, gardening and through online platform management services - maintenance services (e.g. purchase of Colour property agency services, internally Wealth Life Value-added carpark sale, turnkey plan) and usage fee from furnishing and property • Real estate brokerage property managers under leaseback services services - both property
cooperating partnership sales and rentals for access to its platform • Cultural and education services - provision of • Common area value- • Recommend energy- early childhood preschool added services - mainly saving solutions for education advertising Colour Life's existing projects Value- • Installation of equipment • Services for projects • Sales assistance services; • Consultancy services for added and systems for property under construction - property agency services property developers on services to projects (incl. Colour mostly to offer assistance to Agile, Greenland and the management of their non- Life's self-managed to property developers to other small third-party pre-sale activities property services) organise/design developers; home owners experience centers/sales inspection services; and • Consultancy services to • Property agency services offices in preparation of advertising services other property for carpark space sale of property projects management companies
• Service feed for repair • Management consulting • Cleaning, greening, and maintenance, and services - mainly to offer repair and maintenance equipment leasing (e.g. consulting services to services to property surveillance cameras) to small property managers developers at pre-delivery Colour Life's commission- under Greentown stage
based projects Alliance; consulting • Property agency services services to small • Service feed from the for carpark space and developers during the implementation of remaining housing unit whole property cycle; and energy-saving solutions inventories of currently offer services to support for Colour Life's projects managed projects daily operations for industrial parks, small towns as well as other commercial projects
Source: Companies, DBS HK
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Frequently raised concerns on the sector NPM of Top 100 property managers vs China’s average annual wage growth Concern 1: Labour cost 12% Earnings are sensitive to labour cost increase - a valid item 11.0% to monitor. While property managers are spending 10.1% 10.0% considerable efforts to control labour costs, the property 10% 8.9% management industry itself is inherently labour-intensive with a relatively high level of labour required per project 8% managed. In 2018, labour cost represented c.57.8% of 8.2% operating costs of Top 100 property managers according to 7.7% 7.2% 7.3% CIA. This is particularly the case for higher-end property 6% projects where residents/property owners’ service experience is very important. Earnings of property managers are 4% therefore fairly sensitive to labour cost fluctuations, which 2015 2016 2017 2018 has been on an uptrend, growing at a 5-year CAGR of NPM of Top 100 property managers c.9.9%. China's average annual wage growth (%)
China’s average annual wage growth Source: CIA, NBS, DBS HK
Rmb '000 We have done a sensitivity analysis on FY19F net profit 90 82 12% margin (NPM) to labour cost for companies under our 80 74 68 coverage and found that 5-15% increase in labour cost 70 62 11% 56 would translate to a sizable 10-60% drop in net profit for 60 51 11% 10% property managers, assuming other factors remain constant. 50 This explains the share price correction in the sector 40 10% 10% 10% 9% 9% following news on social security payment reform with 30 9% payment to be collected by States Administration of 20 8% Taxation in China. 10
0 7% FY19F NPM sensitivity analysis to labour cost 2013 2014 2015 2016 2017 2018 China's average annual wage (LHS) Additional labour y-o-y growth (%) (RHS) cost increment Colour (F Y19F ) GTS CGS Life A -Liv ing Source: NBS, DBS HK NP impact (%) 5% -20% -15% -12% -11%
10% -39% -29% -24% -22% Nevertheless, as shown in the graph below, the Top 100 15% -59% -44% -35% -34% property managers were able to maintain their net profit margins in the past despite rising labour costs. On one NPM ppt impact hand, the evidently increasing revenue and profit 5% 1.3% 2.7% 1.6% 2.3% contribution of the more profitable VAS business offered 10% 2.5% 5.3% 3.2% 4.5% decent support to property managers’ overall profitability. 15% 3.8% 8.0% 4.8% 6.8% Meanwhile, with the increasing adoption of technology that Source: DBS HK should gradually replace substitutable labour, economies of scale and outsourcing of more services, we believe the pressure on labour cost will gradually ease.
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Concern 2: Pace of conversion of contracted GFA Under our sensitivity analysis, we in fact found that for a 10% and 20% completion slippage from our estimates (the Earnings relatively less sensitive to delivery shortfall. Property latter of which we believe is an extreme case for managers have visible and steady income streams, yet developers), FY19-20F earnings for those companies under growth is a function of the pace of converting contracted our coverage will only be c.1-7% lower than our current GFA into revenue bearing GFA (completion and handover of estimates. This is in part led by earnings support from the project by developers to property owners). In the case of expanding scale of managed GFA versus new contributions. property managers under our coverage, it usually takes c.3- While this factor is frequently raised by investors and is 4 years from obtaining contracted GFA to convert into worth monitoring, we believe the actual earnings impact revenue-bearing GFA. Therefore, a concern commonly from completion slippage is manageable. raised is the possibility that developers may fail to meet their scheduled project deliveries, which would pose earnings downside risk to property managers.
Sensitivity analysis of contracted GFA conversion on our FY19F-20F earnings
F Y19 F Y20 Rev enue Colour Life A -Liv ing GTS CGS Colour Life A -Liv ing GTS CGS -20% -0.29% -0.96% -3.60% -5.54% -0.5% -1.26% -6.48% -8.89% -10% -0.14% -0.48% -1.80% -2.77% -0.2% -0.63% -3.24% -4.45%
F Y19 F Y20 GP Colour Life A -Liv ing GTS CGS Colour Life A -Liv ing GTS CGS -20% -0.77% -0.73% -3.11% -5.29% -1.3% -0.93% -5.65% -8.31% -10% -0.39% -0.37% -1.56% -2.64% -0.7% -0.47% -2.82% -4.16%
F Y19 F Y20 NP Colour Life A -Liv ing GTS CGS Colour Life A -Liv ing GTS CGS -20% -1.62% -0.62% -2.15% -4.79% -2.7% -0.77% -4.40% -7.41% -10% -0.81% -0.31% -1.08% -2.39% -1.4% -0.39% -2.20% -3.71%
Source: DBS HK
Concern 3: Management fee collection rate VAS) and payments on behalf of residents (in the case of commission-based projects). Trade receivables outstanding Management fee collection. Another concern commonly for more than a year could also be another ratio to watch raised is the property manager’s ability to collect cash from for. property owners/residents on time. This is particularly the case for property managers with projects of a lower quality Impairment allowance to trade receivables ratio (i.e. residents are more reluctant to pay for property management services). Revenue and earnings of the property 12% manager may be adversely affected, and a provision on its receivables may have to be made for overdue and 10% uncollectable payments. 8% The impact of a failure to collect fees is typically first reflected 6% under the cashflow statement and in the balance sheet. In the P&L, however, the impact from failure to collect cash will 4% only be reflected when the company decides to make impairment allowances and actual impairments. While this is 2% a potential factor to watch for, we believe immediate earnings impact, if any, is comparatively limited. 0% Colour Life GTS CGS A-Living
Key ratios and figures to monitor would be cash collection FY17 FY18 ratio (sometimes less comparable as these figures are Note: Impairment allowance and receivables for Colour Life includes unaudited) and the ratio of impairments and provisions for respective figures for payments on behalf of residents trade receivables (typically comprising of outstanding Source: Companies, DBS HK uncollected property management fees and revenue from
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Percentage of trade receivables outstanding > 1 year Proportion of revenue in FY19F derived from connected transactions
30% Rmb (bn) 25%
20% CGS 76% 14% 10%
15%
10% A-living 55% 33% 12% 5%
0% 0% 20% 40% 60% 80% 100% CGS A-Living GTS Colour Life Non-connected transaction revenue* FY17 FY18 FY19F revenue from connected transaction FY19F remaining annual cap
Note: Trade receivables for Colour Life includes payments on behalf of residents * % of revenue from non-connected transactions if annual cap of Source: Companies, DBS HK connected transactions is maximised – assuming our FY19F revenue forecasts remain unchanged Source: Companies, DBS HK Concern 4: Connected transactions While revenue derived from connected transactions, Connected transaction from parent/sister developers. This particularly in the case of A-Living, represents a sizeable concern is typically shared by investors on property portion of top line (and likely a higher portion of earnings managers with strong parent/sister developer backings. given better profit margins versus property management Such connected transactions are generally in the form of businesses), we believe property managers’ reliance on consultancy services, property sales and leasing agency connected transactions should gradually decrease as services, etc, which are typically reported as VAS to non- contribution from the property management front picks up property owners. This has also sparked investor concerns on (i.e. conversion of reserved GFA). Our estimates also suggest companies’ corporate governance. that contribution from connected transactions will gradually come down, particularly for A-Living. Nevertheless, we We have excluded Colour Life and GTS in this analysis given believe this is an important factor to monitor for given their their irrelevance to connected transactions (lack/no sizeable contribution to property managers’ financial developer-backing). In the case of A-Living, which is at the performances currently. heart of this debate, has c.33% of its FY19F revenue derived Proportion of revenue derived from connected transactions directly from connected transactions. The case is currently less severe for CGS, where connected transaction is estimated to represent c.14% of its revenue for FY19F. We 40% 36% 33% have mapped our FY19F revenue forecasts as well as our 35% 31% projections on connected transactions of the two companies 30% along with their respective annual caps to visualize the potential impact on their financial performance if those 25% quotas are maximised. 20% 15% 14% 13% 15% 10% 5% 0% 2018A 2019F 2020F
A-living CGS
Source: Companies, DBS HK
Key factor to monitor under this category would be the annual cap on the amount of connected transactions allowed for both property managers.
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In-house scorecard Property management services On the property management side, we have identified four Key attributes for outperformance key attributes: current scale of operation, growth potential, We have identified a few key operational and financial profitability and operational efficiency, and operational risks. attributes for property management services and value- added services. By comparing these, we attempt to gauge the competitiveness and growth potential of the companies under our coverage. Together with the stocks’ current valuations, we aim to offer a comprehensive analysis and identify our preferred stocks within the sector.
Key operational attributes for property management services
Profitability and operational Current scale of operation Growth potential Operational Risks efficiency
Contracted GFA Organic growth Contribution from new Labour cost exposure • Reserved GFA contracts • Reserved GFA as % of revenue-bearing GFA A bility to recover outstanding Growth support from parent fees • GFA presold by parent as • Impairment allowance as % of contracted GFA % of trade receivables Scalability and economies of and % of trade scale receivables > 1 yr M&A capability • Average GFA per project • Cash position managed • No. of previous property management M&A engaged • Intention to growth via M&A
Quality of service • Cash collection rate and service reputation
Source: DBS HK
Category 1: Current scale of operation. Contracted GFA by property managers Contracted GFA. Given the recurring income profile of the property management business, we believe the existing (m sm) scale of operation, which forms an earnings base for the 600 property manager, should be a key attribute to monitor. We 500 look at contracted GFA in their possession as this includes both managed GFA (revenue-generating) and reserved GFA 400 (signed for and pending project delivery and conversion). 300
200
100
0 Colour Life CGS GTS A-Living* FY17 FY18
*GFA for consultancy services has been deducted from A-Living’s numbers Source: Companies, DBS HK
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Category 2: Growth potential GFA presold by parent/related developer in 2018 as % of property manager’s contracted GFA as at end-18 Organic growth. A major source of growth in the property management business is the gradual conversion of signed- 18% for but yet-to-be managed GFA (i.e. reserved GFA). We 16% therefore attempt to gauge this by looking at the amount of reserved GFA available for conversion held by the property 14% manager. 12% 10% Reserved GFA of property managers 8%
(m sm) 6% 350 4% 300 2% 250 0% CGS A-Living GTS Colour Life 200 150 Note 1: Greentown (3900 HK) is treated as a related company of GTS Note 2: Only included GFA presold by Agile (3383 HK); contracted 100 GFA adjusted for area from consultancy services 50 Source: Companies, DBS HK 0 CGS GTS Colour Life A-Living* M&A capability. Another key attribute is the property FY17 FY18 managers’ ability to grow through M&A. Admittedly, excessive reliance on M&A for growth may lead to some *GFA for consultancy services has been deducted from A-Living’s complexities such as project quality issues and conflicts on numbers corporate culture, not to mention the asset-heavy nature Source: Companies, DBS HK and uncertain long-term benefits (highly dependent on quality and scale of the target company). Yet, growth via Support from parent/related developers. We believe GFA this channel provides immediate earnings contribution and growth from parent and other related developers will speeds up market share gains. We attempt to measure gradually slow in the medium to long term given 1) property managers’ M&A capability through 1) cash on moderation in property sales; and 2) increasing scale of hand; and 2) past M&A track record. In the case of the property managers. However, with rapid market share former, this directly relates to the property manager’s consolidation taking place on the property development capability to fund potential acquisition opportunities. For the front, we believe GFA contribution from this end will still latter, potential issues and conflicts may be better handled remain a key source of growth in terms of GFA for with previous experiences. We have also included the management in the short to medium term. We assess willingness of property managers to purse M&A as a parent/related developers’ support through the developers’ channel to grow their property management business as GFA presold in 2018 as a proportion of the property part of the criteria. manager’s contracted GFA as at end-18.
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Cash on hand among property managers exploring M&A opportunities, whereas the latter has no intention to pursue any material M&A in the near term. (Rmb bn) Quality of services. On one hand, we expect competition in 6.0 the property management space to increase along with rising competition from in-house players to participate in 5.0 third party projects. On the other hand, contribution from 4.0 existing projects in the secondary market (with property owners’ associations formed) should gradually expand, with 3.0 negotiating power from residents/property owners set to increase. Consequently, we believe service quality will 2.0 become an increasingly crucial element to underscore 1.0 property managers’ growth potential in the longer run. Meanwhile, we believe better service quality can eventually 0.0 translate into higher client satisfaction, which may enhance CGS A-Living Colour Life GTS property managers’ ability to command higher management FY17 FY18 fees for new projects and to negotiate price hikes in its existing projects. This may also lead to increased willingness Note 1: Consideration paid for the acquisition of Qingdao Huaren, for property owners/residents to pay management fees in a Harbin Jinyang and Guangzhou Yuehua are included in A-Living’s figures timely manner. In this aspect, we measure property Note 2: CGS’s proceeds received from its top-up placement in Jan-19 managers’ service quality through cash collection rates. We as well as consideration paid for the acquisition of two property also note there are several qualitative factors such as management companies have been incorporated companies’ reputation in the market and the general Note 3: Consideration for the acquisition of Montessori Academy by number of units that are allocated to a butler/steward of the GTS in Mar-19 is included Source: Companies, DBS HK property manager. The ranking under this measure is: GTS - > A-Living -> CGS -> Colour Life.
Number of property management M&As executed Cash collection rate
Number of Acquisitions (times) 100% 50 99% 45 40 98% 35 97% 30 96% 25 20 95% 15 94% 10 93% 5 0 92% 2015 2016 2017 2018 GTS CGS Colour Life A-Living Colour Life GTS A-Living CGS FY17 FY18
Source: Companies, DBS HK Source: Companies, DBS HK
Intention to grow via M&A. We have also taken into account property managers’ willingness to go through the complexities that may arise from pursuing M&A as a growth strategy. M&A is at the heart of A-Living’s growth strategy to enlarge its market share in the property management space. CGS comes second as the company is willing to grow via M&A as well, although it takes a conservative stance. GTS and Colour Life rank third and fourth respectively in our view, as the former has shown only a small interest in
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Category 3: Profitability and operational efficiency. Average GFA per project managed
Contribution from new projects. As mentioned above, profit ('000 sm) margins for a typical property management project are at 300 the peak upon initial commencement of services and will 250 gradually decline over time as costs (such as labour costs) of managing the project will gradually increase, as opposed to 200 a generally static property management fee. We therefore attempt to assess property managers’ profitability through 150 analysing property managers’ reserved GFA outstanding 100 versus current level of GFA under management. 50 Reserved GFA as % of GFA under management 0 A-Living CGS Colour Life GTS 200% FY17 FY18 180%
160% Source: Companies, DBS HK 140% 120% Category 4: Operational risks. 100% 80% Labour cost exposure. As labour cost represents the largest cost element for property managers, earnings sensitivity to 60% labour cost is one of the key concerns of investors, 40% particularly given that annual wages in China (particularly 20% basic labour) have been increasing over the past few years. 0% We have conducted a sensitivity analysis of the impact of CGS GTS A-Living* Colour Life 5%/10%/15% labour cost increase on property managers’ FY17 FY18 FY19F earnings while keeping other variables constant.
*Contracted and under-management GFA of A-Living have been FY19F earnings sensitivity to labour cost fluctuations adjusted for area from consultancy services Source: Companies, DBS HK 0%
Scalability and economies of scale. Property management -10% projects are generally labour intensive in nature with a basic -20% amount of labour required per project to ensure that services are of an appropriate level of quality. As such, one -30% may argue that economies of scale for property managers is -40% somewhat limited versus other industries. Yet, while an increase in the number of projects managed does not often -50% go hand-in-hand with cost efficiency, larger projects in -60% general offer more room for cost optimisation. We have therefore looked at property managers’ average GFA per -70% A-Living Colour Life CGS GTS project managed to measure their current level of operational efficiency and assess potential room available 5% increase 10% increase 15% increase for improvements. Source: Companies, DBS HK Ability to recover outstanding management fees. Another key concern shared relates to property managers’ ability to recover outstanding property management fees. The problem of delaying/refusing payments remains relatively common at the moment. In this aspect, we look at the property manager’s impairment allowance to trade receivables (mostly outstanding fees to be collected for property management services and VAS) ratio as well as the proportion of trade receivables outstanding for more than one year.
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Impairment allowance to trade receivables ratio CGS and A-Living have stronger growth potential in property management space. Based on key attributes listed 12% above (equally-weighted), CGS and A-Living are the most preferred counters in the property management space. CGS 10% has strong growth visibility from (i) projects to be gradually delivered by Country Garden, one of the largest property 8% developers in China, and (ii) sizeable reserved GFA accumulated over the past few years led by Country 6% Garden’s accelerated presales growth. Meanwhile, A-Living 4% is the second most preferred counter based on high growth potential in this space, driven by its M&A-led growth 2% strategy.
0% Overall score of property managers Colour Life GTS CGS A-Living FY17 FY18 Current Profitability scale of Growth and Operational Ov erall Note: Impairment allowance and receivables includes respective figures operation potential efficiency risk s rank ing for payments on behalf of residents for Colour Life CGS 2 1 1 4 1 Source: Companies, DBS HK A-Living 4 3 2 1 2 GTS 3 2 3 3 3 Percentage of trade receivables outstanding > 1 year Colour Life 1 4 4 2 3 Source: DBS HK 30%
25%
20%
15%
10%
5%
0% CGS A-Living GTS Colour Life FY17 FY18
Note: Trade receivables includes payments on behalf of residents for Colour Life Source: Companies, DBS HK
Summary of scores by attributes for each property manager
Potential Ability to recover Current M&A capability Quality New for Labour oustanding fees scale of Organic Parent (Cash (T rack (Intention of project economies cost (provisioned (>1y r Ov erall operations Growth support lev el) Record) for M&A ) serv ices contribtion of scale exposure impairment) receivables) rank ing CGS 2 1 1 1 3 2 2 1 2 3 2 4 1 A-Living 4 4 2 2 4 1 3 3 1 1 1 3 2 GTS 3 2 3 4 2 3 1 2 4 4 3 2 3 Colour Life 1 3 4 3 1 4 4 4 3 2 4 1 3 Source: DBS HK
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Value-added services. complementary nature to property management services; and 2) strong growth potential given the inherent proximity Currently, VAS comprises both VAS to non-property owners between property managers and thousands of households and community VAS. We believe revenue and earnings within their managed communities. We therefore focus on contribution from community VAS will gradually take the property managers’ current exposure and growth potential lead to become the major growth driver given 1) its within the community VAS segment.
Key operational attributes for VAS
Current expsoures on Potential market size Distribution Channel Growth potential community VAS
Potential in managed Online platform Intention to grow via M&A No. of major types of communities establishment community VAS on offer • Units currently under • No. of active users management
Quality of project • Average management fee Source: DBS HK
Category 1: Current exposure to community VAS. Estimated no. of units under management
Number of community VAS with meaningful contribution ('000) on offer. The metric we chose to gauge property managers’ 4,000 current exposure is the number of community VAS offerings 3,500 with meaningful contribution. We define “meaningful” as 3,000 those offerings that will generate annual revenue of more 2,500 than Rmb50m in FY19F. 2,000 No. of meaningful community VAS on offer 1,500 1,000 No. of community VAS offerings > Rmb50m in FY19F 500 9 0 8 Colour Life CGS GTS A-Living* 7 FY17 FY18
6 *GFA for consultancy services has been deducted from A-Living’s 5 numbers Source: Companies, DBS HK 4 3 Project quality. We define project quality as the willingness 2 and affordability of property owners/residents within the managed community. We believe those who are willing to pay 1 a premium for better services will likely be more inclined to 0 spend more on VAS that can enhance their living standards. GTS Colour Life CGS A-Living Property managers with higher quality projects should Source: Companies, DBS HK therefore have higher growth potential on their VAS offerings. We measure project quality by calculating the average Category 2: Potential market size. management fee achieved by each property manager. This is done through extracting property managers’ income from Current market size in managed communities. We assess property management in FY18 and dividing it by average GFA property managers’ potential market size in their managed under management during the period (i.e. average of the GFA communities through the number of units currently under as at Jan-18 and Dec-18). In the case of Colour Life and A- management. We have assumed an average unit size of Living where they each have a meaningful exposure to 100sm by GFA. commission-based projects, we have adjusted the revenue based on 10% commission fee for comparison purposes.
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Average management fee achieved Category 4: Growth potential
(Rmb/sm/mth) Intention to pursue M&A opportunities. VAS remains at the 3.0 preliminary stages of development for most property managers. An alternative route for growth may come from 2.5 M&A, where competition is manageable as most property 2.0 managers are focused on looking for M&A opportunities on the property management side. We ranked the four 1.5 property managers in this category by their willingness to pursue M&A opportunities for growth. Based on our 1.0 understanding, GTS is the most active in terms of acquiring 0.5 VAS-related companies (per previous acquisition records and reiteration of this strategy on numerous occasions). This is 0.0 closely followed by CGS, who is now actively exploring GTS CGS A-Living Colour Life opportunities both off- and on-shore. A-Living is third as FY17 FY18 majority of its focus is on acquiring property management companies. Colour Life is last among the four as 1) the Source: Companies, DBS HK property manager intends to act as an agent for its Category 3: Distribution channel community and third-party service providers; and 2) the company intends to control its debt level and has little Online platform establishment. While online platform intention to participate in M&As in the near term. development is still at a preliminary stage with actual impact to property managers yet to seen, its inherent potential to GTS has the best potential in VAS, followed by CGS. Based establish a direct distribution channel and the opportunity to on our list of key attributes, GTS was ranked first among better monetise property managers’ resources and under- peers thanks to its highest project quality, with sizeable management communities should not be overlooked. We existing presence in community VAS services as well as its seek to assess the property managers’ readiness and strong intention to grow its VAS segment, which includes development of online platform by looking at the number of tapping into quality players via M&A. CGS was second on active users on their platforms. similar grounds with a good balance in our identified key attributes. Number of active users on online platform
('000) 8,000 7,000 6,000
Thousands 5,000 4,000 3,000 2,000 1,000 0 Colour Life CGS GTS A-Living* FY17 FY18
*A-Living no longer reports the figure as it has shifted its focus temporarily away from online platform development Source: Companies, DBS HK
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Ranking of property managers on VAS based on identified key attributes
Current exposure on Distribution Growth community VAS Potential market size channel potential No. of Current meaningful types of potential in Online community managed Quality of platform Intention to Ov erall Companies VAS on offer communities project establishment grow via M&A rank ing GTS 1 3 1 2 1 1 CGS 3 2 2 3 2 2 Colour Life 2 1 4 1 4 3 A-Living 3 4 3 4 3 4 Source: DBS HK
CGS and GTS are most preferred within the sector. We have allocated a 50:50 weighting on the average ranking for our covered names regarding their attributes within property management and VAS space. Among those, CGS and GTS are the most preferred names after considering overall operational metrics. This is swiftly followed by Colour Life and A-Living.
Overall ranking
Property management serv ices V A S Ov erall Companies (avg score) (avg score) score CGS 1 2 3 GTS 3 1 4 Colour Life 3 3 6 A-Living 2 4 6 Source: Companies, DBS HK
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Valuations and financial comparisons Ex-cash PE multiples
PE multiples adopted as valuation method. Given 1) sector’s Colour asset-light business model; 2) high earnings visibility; and 3) V aluation GTS Life CGS A -Liv ing A v erage Forward PE* emerging dependence on M&A for growth, which adds FY19E 27.3 10.0 34.0 16.0 21.8 uncertainty on future operational capex, we have opted to FY20E 21.2 7.8 25.9 13.0 17.0 use PE multiple method to value property management companies under our coverage. Our target PE multiples are Ex-cash forward PE* set through benchmarking the stocks’ historical FY19E 23.7 9.8 28.4 11.3 18.3 average/median PE multiples, which are adjusted according FY20E 17.7 7.0 20.4 9.1 13.5 to our findings from our comparison analysis above. *Based on closing prices at 9 Jul 2019
Source: Bloomberg Finance L.P., DBS HK Valuations Valuation differentiation consistent with our score ranking. Colour A- Since our sector initiation report published in Feb-19, our V aluation GTS Life CGS Liv ing covered stocks have traded largely in tandem with our Historical 1-year forward PE muiltiples ranking. For example, CGS was previously trading at 1-year Historical average (x) 26.8 17.7 33.0 18.2 forward ex-cash PE that was below the line (as indicated in Historical median (x) 26.7 15.8 32.3 17.4 the graph below) has witnessed share price and valuation Historical peak (x) 38.4 46.8 53.1 27.2 re-rating over the past four months. Similarly, GTS has de- Historical trough (x) 17.1 7.3 22.1 11.0 rated below the line in the past few months. Colour Life and Historical 1-year forward PE muiltiples (since 2018) A-Living exhibited similar patterns in terms of their share Historical average (x) 28.9 11.6 33.0 18.2 price and valuation Historical median (x) 28.1 10.9 32.3 17.4 Historical peak (x) 38.4 17.8 53.1 27.2 Ranking vs Valuations Historical trough (x) 21.8 7.3 22.1 11.0 Valuation multiples FY20 PE 23.0 Target FY19/20 PE multiple (x) 28.9 11.6 33.0 18.2 CGS Target price 7.7 6.8 20.2 17.9 21.0 Current price (HK$)* 6.3 5.3 18.0 14.1 GTS 19.0 Current FY19F valuations (x)* 27.3 10.0 34.0 16.0 17.0 21.2 8.2 25.9 13.0 Current FY20F valuations (x)* 15.0 Upside potential (%) 21% 29% 12% 27% 13.0 *Based on closing prices at 9 Jul 2019 11.0 Source: Bloomberg Finance L.P., DBS HK A-Living 9.0 7.0 An alternative way to look at valuations – ex-cash forward 5.0 Colour Life PE multiple. In light of the typical cash-rich positions of 3.0 4.0 5.0 6.0 property management stocks, we have calculated the ex- Overall ranking cash forward PE multiples to offer a clearer picture regarding the valuations of the counters within our covered *Based on closing prices at 9 Jul 2019 universe. On a comparable basis, the sector (which refers to Source: Bloomberg Finance L.P., DBS HK the four companies under our coverage) trades at a simple- averaged 18x/14x FY19F/FY20F PE ex-cash. We believe the Focus now on fundamentals based on scorecard. Since we sector is not as expensive as some investors may have initiated coverage on the sector, valuation now appears to initially thought. be fairer on a relative basis. We believe the sector can re- rate further as the market increasingly appreciates the sector’s defensiveness and growth potential. In this regard, we would undertake a selective stock picking strategy based on the individual stock’s fundamentals.
CGS is our top pick in the sector. Since listing, CGS has traded at a sizeable premium to peers, which is consistent with its superior fundamentals as identified by our in-house scorecard, which highlighted the stock’s superior
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profitability that is sustainable. This is backed by 1) sizeable The sizeable number of connected transactions is also volume of higher-margin new projects coming onstream another question mark on the company’s earnings representing c.29% of total GFA under management in sustainability. However, our estimates show that coupled FY19F/FY20F; and 2) strong earnings visibility underpinned with our modest M&A assumption (FY20: 30m sm vs c.49m by strong support from parent CG and scalable reserved sm YTD in FY19), the company’s net profit should continue GFA at hand to be converted. The share price took a to grow at a decent 2-year CAGR of 26% for FY18-FY20F breather in Jan-19 from an unexpected share placement but despite the high base in FY18. Revenue from connected its share price swiftly picked up after it reported strong FY18 transactions is also expected to trend down gradually results. While the counter is currently trading at a seemingly alongside rapid development of its property management rich valuation versus its peers, we believe its premium is in business from our estimation of c.36% in FY18 to c.31% by fact reasonable given that it has the strongest growth FY20F. We have a BUY rating on the stock with a HK$17.91 potential backed by solid earnings visibility. This is in line TP with our method of picking stocks within a defensive sector. We currently have a BUY rating on the stock with HK$20.18 GTS’s share price took a hit and underperformed peers after TP, pegged to 33.0x PE on the average earnings in reporting a set of disappointing FY18 results weighed down FY19/20F, on par with the company’s historical 1-year by 1) larger-than-expected losses in its property asset forward average PE. management and education businesses; and 2) larger-than- expected increase in SG&A. Additionally, its recent Colour Life is currently trading at the lowest valuation in the acquisition of an Australian education service provider has sector and below its historical average, led in part by market incurred additional expenses to be booked this year, not to concerns regarding its lack of parent support, comparatively mention the possibility where GTS may have to incur lower project quality, and uncertainty on its growth strategy dividend tax for its future dividend payments as the that focuses on online platform development. But these acquisition should have utilised a sizeable amount of their concerns have overshadowed Colour Life’s sizeable offshore cash. These are a series of short-term hiccups that recurring income base that has been expanding, GTS will have to bear with in the near term. Yet, we believe notwithstanding the developing ecosystem between its the company’s superior long-term fundamentals within the existing property management business and its online property management business and VAS offerings is intact, platform. We believe the stock warrants to trade at least at with valuations now returning to a more attractive level for on-par with its historical average of c.11x forward PE since long-term investors to accumulate. We currently have a BUY 2018. We currently have a BUY rating on the counter with a rating on the counter with a HK$7.67 TP. TP of HK$6.77. Taking both fundamentals and valuations into account, CGS A-Living’s valuation is lower-than-peers on the back of is our top pick in the sector. Colour Life is also an attractive ongoing market concerns on the company’s ability to secure opportunity on a risk-reward perspective. quality and scalable M&A opportunities at reasonable cost.
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Financial comparison
Financial comparison GTS Colour Life CGS A -Liv ing Revenue (Rmb m) FY18A 6,710 3,614 4,675 3,377 FY19E 8,755 4,456 6,863 5,107 FY20E 11,070 5,413 9,752 6,488
Revenue growth (%) FY18A 31% 122% 50% 92% FY19E 30% 23% 47% 51% FY20E 26% 21% 42% 27% 2-year CAGR 28% 22% 44% 39%
Revenue from VAS (Rmb m) FY18A 2,249 550 1,208 1,752 FY19E 2,911 698 1,735 2,535 FY20E 3,494 830 2,503 3,238
Revenue from VAS (%) FY18A 34% 15% 26% 52% FY19E 33% 16% 25% 50% FY20E 32% 15% 26% 50%
Net profit* FY18A 433 485 923 801 FY19E 568 608 1,240 1,033 FY20E 730 742 1,630 1,276
Net profit growth (%)* FY18A 12.9% 51.3% 129.8% 176.5% FY19E 31.2% 25.4% 34.3% 29.0% FY20E 28.6% 22.0% 31.5% 23.4% 2-year CAGR 30% 24% 33% 26%
Net profit margins (%)* FY18A 6.4% 13.4% 19.7% 23.7% FY19E 6.5% 13.6% 18.1% 20.2% FY20E 6.6% 13.7% 16.7% 19.7%
EPS (Rmb)* FY18A 0.16 0.38 0.37 0.62 FY19E 0.20 0.46 0.47 0.77 FY20E 0.26 0.56 0.61 0.96
EPS Growth (%) FY18A 11.7% 17.7% 129.8% 77.5% FY19E 31.2% 22.0% 26.0% 25.4% FY20E 28.6% 22.0% 31.3% 23.4% 2-year CAGR 30% 22% 29% 24%
Balance sheet items (as at Dec-18) Net cash/(debt) positions (Rmb m) 2,328 (647) 3,874 4,809 Book value (Total equity) - Rmb m 2,405 3,256 2,330 5,510 * GTS’s figures are estimated core profit numbers. Source: Companies, DBS (HK)
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Unlisted names: Which are hidden gems? GFA of the various property management arms. Additionally, we included developers’ GFA sold in 2017 and Increasing incentives for developers to spinoff their property 2018 in order to gauge the potential operational scale for management arms. Aside from the already-listed property 2020. Incorporating the industry average net profit margin managers, a decent number of developers have expressed and average portion of net profit contributed by property interest in spinning off their property management arms as management services among Top 100 property managers in a channel to unlock the hidden values of their businesses, 2018, we accordingly put an estimate of their respective particularly under the current situation where property earnings in 2018 and 2020. management companies are trading at much higher valuation multiples than developers. Meanwhile, cultivating Key assumptions behind the estimates: 1) all GFA sold by recurring income streams is now an increasingly important developers in the past were awarded to their respective part of developers’ agenda alongside a seemingly maturing property management arms; 2) the property manager did property development market. Property management not participate in any third-party projects; and 3) developers presents a natural and valuable opportunity for them to will deliver their projects within two years after sale. In our achieve this aim. It makes sense for developers to dedicate view, these assumptions are reasonable given that 1) more effort to cultivate this business and separately list it for property management in the past has often been perceived additional resources to accelerate the development of the as after-sales services of the development business to segment. maintain the reputation of the respective developers, hence, it is reasonable to assume that developers would manage Different modes of spinoff may indicate developers’ their own projects; and 2) developers typically deliver their incentive to foster the business. Currently, developers’ projects within two years after presales. As developers property management arms are largely held under two decide to expand their presence within the property forms: 1) held under the group of companies together with management business, they may start to engage in third the developer but outside of the listco; and 2) held under party projects as well. In this scenario, our estimates here the listco. For the former, the business will be separately may turn out to be more conservative. listed through the sale of newly issued shares (as per normal IPO). In the case of the latter, developers would have a 10 of 23 companies under our screening criteria may be choice to either list the entity through sale of shares or by ready for listing in the near term. Our analysis list includes introduction. In our view, the path chosen by the developer 23 companies who have expressed their willingness to spin- to list the entity would reveal the level of intention to off their property management arms. Of which, ten meet further develop the business. As opposed to selling its our abovementioned criteria, while the remaining thirteen interest, listing by introduction will not lead to a dilution in companies would need to expand their operational scale in developer’s interest within the business and thus may order to ensure successful listing in the longer term. indicate its higher level of optimism and commitment on the segment. Ample interest from investors for potential spinoffs. With the sector’s stellar share price performances and an Scale is a key factor for successful listing. With reference to increasing number of companies getting listed on the HKEx, newly listed property management companies in FY18/19, investor awareness on the sector has increased with rising we observed that the minimum requirement to garner interests on existing players to gain exposure on the sector reasonable investor interest stands at c.10m sm of GFA as well as upcoming potential candidates to watch out for. under management and is usually coupled with another In our view, we believe these potential candidates that have c.10m sm of reserved GFA to be converted in later years, some of the below-mentioned qualities would stand out and this will vary according to the quality as well as type of from the crowd and attract investor attention: 1) project under management. Meanwhile, the net profit level operationally scalable with well-established reputation; 2) in achieved by these companies is typically above HK$50m. possession of a decent portion of non-residential properties With these observations in mind, we have set the following within their managed portfolio; or 3) players with a regional criteria to identify potential candidates for listing in the near focus that are more capable of maximising operating term: 1) >20m sm of contracted GFA; 2) >10m sm of GFA efficiency. under management; and 3) net profit of >HK$50m in FY18. Among the ten players that were identified in our analysis, GFA sold in the past with reference to industry average CR Land, Shimao property, R&F and SZI have meaningful statistics to gauge potential size of developers’ property existing operational scale with reputable brand names. management arm. Given lack of official data available, we Meanwhile, China Jinmao, KWG, Yuexiu, R&F, SZI, LVGEM accumulated total GFA sold between 2007-2016 together and China SCE have higher exposure to non-residential with developers’ investment properties (including hotels) on properties. Developers with a clear regional focus include hand as a proxy to estimate the scale of revenue bearing KWG, Times, Yuexiu, CCRE, R&F, Logan, SZI, China SCE, and LVGEM.
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regional exposure could be another channel for developers On an overall basis, we believe the property management to boost the scale of their property management business to arms of CR Land, Shimao Property, Central China, R&F and unlock hidden value. SZI would gain investor attention. Meanwhile, KWG, Yuexiu, China SCE and LVGEM have favourable Sino-Ocean and Jinmao could be a potential pair for M&A. characteristics that may spark interest from investors. With a similar SOE background (China Shipping and Sinochem as respective major shareholders), property focus Smaller players with strong intention to spin off their (both hold a considerable amount of office buildings) and property management arms may choose to expand through similar city exposure in terms of city tiers (both are focused M&A. Aside from assessing potential spin-off candidates by on Tier 1/2 cities), we believe a potential merger of making an estimate of their operational scale, we have also operations between the two could offer positive synergies checked with respective developers on their appetite and enhance operational scale. Companies with similar towards carving out their property management arms for exposure in Fujian area (e.g. Yuzhou, China SCE, Shimao) listing in the near term. In our view, acquiring other smaller- could be another combination. Companies with roots in the sized players with similar background, product focus and Greater Bay Area could also seek to cooperate.
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List of developers with unlisted property management arms
Property managers Contracted GFA > GF A under Est. net profit > Met scale for under developers 20m sm? management > 10m HK$50m? successful listing? HK-listed sm? CR Land √ √ √ √ Shimao Property √ √ √ √ China Jinmao √ X X X KWG √ √ √ √ Times China X X X X Yuexiu √ √ X X Central China √ √ √ √ GZ R&F √ √ √ √ Logan √ √ X X SZI √ √ √ √ BJ Cap Land √ √ √ √ China SCE X X X X China South City √ √ √ √ Gemdale X X X X Hopson X √ √ X Minmetals X X X X Poly HK √ √ √ √ Powerlong X √ √ X Road King X X X X Shui On Land X X X X Ronshine China X X X X SRE Group X X X X Sunshine 100 X X X X Yanlord X X X X Yuzhou X X X X Zhenro X X X X Zhong An X X X X Sunac √ √ √ √ Vanke √ √ √ √ Evergrande √ √ √ √ LVGEM X X X X Sino-Ocean √ √ √ √
China-listed Poly CN √ √ √ √ China Fortune Land √ √ √ √ Jinke Group √ √ √ √ Yango √ X X X Gemdale Group √ √ √ √ Source: Companies, CIA, DBS HK
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Potential listing candidates
Property managers Met scale for Interest on spin-off? May be spun off in May be spun off under developers successful listing? the near term later on HK-listed 0 CR Land √ √ √ X Shimao Property √ √ √ X China Jinmao X √ X √ KWG √ √ √ X Times China X √ X √ Yuexiu X √ X √ Central China √ √ √ X GZ R&F √ √ √ X Logan X √ X √ SZI √ √ √ X BJ Cap Land √ √ √ X China SCE X √ X √ China South City √ X X X Gemdale X √ X √ Minmetals X √ X √ Poly HK √ X X X Powerlong X √ X √ Shui On Land X √ X √ Ronshine China X √ X √ Yanlord X √ X √ Yuzhou X √ X √ Zhenro X X X X Sunac √ X X X Vanke √ X X X Evergrande √ X X X LVGEM X √ X √ Sino-Ocean √ X X X
China-listed Poly CN √ √ √ X China Fortune Land √ √ √ X Gemdale Group √ √ √ X Source: Companies, CIA, DBS HK
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Special characteristics that could be attractive to investors
Property managers under Scale Exposure to non- Regional focus dev elopers Residential CR Land √ Shimao Property √ China Jinmao √ KWG √ √ Times China √ Yuexiu √ √ Central China √ GZ R&F √ √ √ Logan √ SZI √ √ √ BJ Cap Land China SCE √ √ Gemdale Minmetals Powerlong √ Shui On Land √ Ronshine China Yanlord Yuzhou √ LVGEM √ √ Source: Companies, CIA, DBS HK
What kind of valuations should we be looking at? We have also looked at potential valuations that these IPO valuation of property managers listed in 2018/19 unlisted property managers may be able to achieve upon listing in Hong Kong. With the exclusion of CGS which was 1-year forward PE (x) listed by introduction, the average 1-year forward IPO 23.5 A-Living, 21.7 valuation for property managers listed during 2018-19 21.5 stood at c.15.1x (or 35x PE calculated with the latest Aoyuan 19.5 S-Enjoy, 14.7 historical year). Our review of recently listed property Healthy Life, 14.9 managers unveiled a seemingly positive relationship 17.5 between IPO valuation achieved by property managers 15.5 versus operational scale. 13.5 Ever Sunshine, 11.5 13.9 Alongside growing market recognition of the sector’s Binjiang Kaisa growth potential and earnings visibility as illustrated by re- 9.5 Service, Property, 13.5 11.9 rating of the sector’s valuation, we believe property 7.5 management names that are looking to be listed in Hong 0 20 40 60 80 Kong in the near term should command similar valuation as GFA under management ('000sm) those recently listed in 2018/19, with those with a larger *excludes CGS which was listed in Hong Kong by introduction scale and better fundamentals or unique exposure attracting Source: Companies, local newspapers, DBS HK higher valuations.
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IPO of property managers in Hong Kong
Number of shares Under Net Mark et PE on immediately Contracted management profit cap at 1-y ear profit of IPO upon GF A when GF A when when issue forward latest Stock Date of price issuance listing listing listed price PE historical Company name Code listing (HK$) (m shares) ('000 sm) ('000 sm) (LCL m) (HK$m) (x) y ear Colour Life 1778 HK 6/30/2014 3.78 100 63,982 58,200 44.4 378 13.5 8.52 China Overseas Property 2669 HK 23-10-15 0.94 3,287 n.a. 67,622 97.1 3,090 15.4 31.82 Clifford Modern Living 3686 HK 11/8/2016 0.46 1,000 5,813 n.a. 34.8 460 n.a. 13.20 Zhong Ao 1538 HK 11/25/2015 1.88 800 32,959 13,405 56.0 1,504 12.2 26.84 GTS 2869 HK 7/12/2016 1.99 2,778 171,899 82,800 197.8 5,528 12.0 27.95 Riverine China 1417 HK 12/11/2017 1.55 400 8,656 4,904 31.0 620 n.a. 20.02 A-Living 3319 HK 2/9/2018 12.30 1,333 102,084 76,184 281.3 16,400 21.7 58.3 CGS 6098 HK 19-06-18 10.00 2,500 365,400 131,000 401.7 25,000 22.1 62.2 S-Enjoy 1755 HK 11/6/2018 2.90 800 73,340 37,027 73.4 2,320 14.7 31.6 Kaisa Property 2168 HK 12/6/2018 9.38 140 30,445 25,423 71.4 1,313 11.9 18.4 Ever Sunshine 1995 HK 12/17/2018 1.78 1,500 42,353 32,099 76.4 2,670 13.9 34.9 Binjiang Service 3316 HK 3/15/2019 6.96 267 17,925 10,818 57.2 1,856 13.5 32.5 Aoyuan Healthy Life 3662 HK 3/18/2019 3.66 700 19,899 10,432 69.8 2,562 14.9 36.7 Hevol Services^ 6093 HK 12-07-19 1.42 400 8,160 6,347 16.9 568 33.6
Average for companies listed in FY18/19 (excl. CGS) 93,064 46,140 147 7,446 15.1 35.4 Average for companies listed in FY18/19 (excl. CGS & A-Living) 36,792 23,160 70 2,144 13.8 30.8 *A-Living’s net profit when listed was an estimate provided by the company in its IPO prospectus ^Hevol Services’ IPO price is estimated using the mid-end of its IPO price range Source: Companies, DBS HK
M&A pursued by listed property managers in 2018-2019
Date of Target company A cquirer Major type of GF A Stak e Consideration 1-y ear acquisition properties (m sm) (%) (Rmb m) forward v aluation Multiple (x) 09-04-18 Zizhu Property Management A-Living Residential 27.50 51.0% 204.81 10.72 07-11-18 Lanzhou Chengguan Property Services A-Living Public Properties 30.00 51.0% 147.90 9.67 26-11-18 Beijing Shengshi Property Services CGS Residential 70% 26-11-18 Chengdu Jiaxiang Property Management CGS Residential 100% 26-11-18 Chengdu Qinghua Yijia Property Management CGS Residential 22.00 100% 772.59 10.04 26-11-18 Nanchang Jiejia Property CGS Residential 100% 26-11-18 Shanghai Ruijing Industrial CGS Industrial 100% Jan-19 Guangdong Yuanhai CGS n.a. 3.40 100% 100.00 8.56 Jan-19 Shanghai Lianyuan* CGS Residential 3.51 100% 136.00 9.71 23-01-19 Qingdao Huaren Property A-Living Residential 6.10 89.7% 133.58 12.28 23-01-19 Harbin Jingyang Property Management A-Living Residential 10.50 92.0% 173.88 10.50 19-03-19 Beijing Shengshi Property Services* CGS Residential n.a. 30% 90.00 7.80 28-03-19 Guangzhou Yuehua Property A-Living Public Properties 32.00 51.0% 195.34 9.05 12-04-19 Jiaxing Dashu Property Management Kaisa Property Mixed 7.90 60% 36.58 10.00 19-06-19 Qingdao Yayuan Property Management Ever Sunshine Commercial 1.80 55% 462.00 14.00 *PE multiple calculated based on the latest year of reported earnings Source: Companies, DBS HK
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Property developers that have satisfactory scale and may spin-off their property management arms in the near term
Possible to spin-off with willingness Property managers under developers CR Land* Shimao KWG Central GZ R&F BJ Cap Powerlong SZI* Property China Land 10-year GFA sold (2007-2016) 40,230 35,141 10,153 16,114 29,196 15,717 8,491 4,914 GFA sold in 2017 + 2018 21,532 16,749 6,226 12,017 16,504 5,463 4,384 1,135 Investment properties at hand 9,210 1,200 878 - 2,168 2,343 2,856 1,140 Hotel at hand 438 - 253 286 3,904 - - - Landbank (excl. 2017 and 2018 contracted GFA) 38,041 38,631 18,988 34,060 41,296 7,087 16,816 5,147
Landbank breakdown as at Dec-18 % in GBA 11% 11% 38% 0% 8% 4% 0% 61% % in YRD 18% 17% 17% 0% 8% 12% 69% 19% % in Bohai Rim 15% 12% 15% 0% 16% 45% 9% 0% % in Rest 56% 60% 30% 100% 68% 39% 22% 20%
Estimated GFA under management 100,000 36,341 11,284 16,400 35,268 18,060 11,347 50,000 Estimated Reserved GFA 100,000 26,407 10,973 20,532 26,828 7,235 8,588 2,422 Estimated FY20F Net profit (Rmb m) 396 172 70 107 211 89 83 171 Potential Market Capitalisation (HK$m) 7,567 2,422 900 1,271 2,946 1,341 1,215 3,203 * GFA under management and reserved GFA estimates will be replaced if developers have separately disclosed their GFA under management Source: Companies, DBS HK
Property developers with satisfactory scale for listing but have no plans to separately list their property management arms
Possible to spin-off without willingness Property managers under developers Poly HK* China South V ank e Ev ergrande Sino- Sunac City Ocean* 10-year GFA sold (2007-2016) 18,492 6,697 132,317 145,955 20,780 22,919 GFA sold in 2017 + 2018 4,882 2,807 76,329 102,734 8,399 52,860 Investment properties at hand 677 3,746 39,740 9,430 1,219 - Hotel at hand 130 - - - - - Landbank (excl. 2017 and 2018 contracted GFA) 15,368 31,563 79,027 200,696 32,041 112,752
Landbank breakdown as at Dec-18 % in GBA 12% 0% 0% 7% 13% 6% % in YRD 10% 0% 0% 13% 12% 20% % in Bohai Rim 14% 0% 0% 18% 40% 23% % in Rest 64% 0% 0% 63% 34% 51%
Estimated GFA under management 34,000 10,444 172,057 155,385 21,999 22,919 Estimated Reserved GFA 8,724 10,698 96,086 152,908 16,409 81,048 Estimated FY20F Net profit (Rmb m) 124 81 973 821 225 247 Potential Market Capitalisation (HK$m) 2,102 1,430 14,192 9,835 3,678 1,470 * GFA under management and reserved GFA estimates will be replaced if developers have separately disclosed their GFA under management Source: Companies, DBS HK
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Property developers with property management arms that have expressed intention for separate listing but are still in the phase of expanding scale
Possible to spin-off after further expansion Property managers under developers China T imes Yuexiu Logan* Gemdale Minmetals Shui On Ronshine Yanlord Yuzhou LVGEM China J inmao China Land China SCE 10-year GFA sold (2007-2016) 4,841 8,967 10,801 11,208 2,982 2,989 4,255 5,141 5,667 7,738 501 7,144 GFA sold in 2017 + 2018 7,378 6,555 4,989 6,827 4,741 817 606 10,118 1,341 6,084 352 6,063 Investment properties at hand 780 557 810 273 661 16 1,178 - 438 2,000 558 862 Hotel at hand 637 - - 20 - - 208 - - - 48 - Landbank (excl. 2017 and 2018 contracted 35,511 11,891 14,151 29,434 9,009 3,743 7,921 15,282 6,666 11,300 4,748 17,997 GFA)
Landbank breakdown as at Dec-18 % in GBA 8% 61% 49% 56% 6% 43% 14% 0% 22% 4% 80% 0% % in YRD 38% 0% 19% 1% 23% 19% 34% 33% 47% 33% 20% 21% % in Bohai Rim 21% 0% 10% 0% 21% 24% 0% 3% 22% 12% 0% 4% % in Rest 33% 39% 22% 43% 49% 13% 52% 64% 9% 50% 0% 75%
Estimated GFA under management 6,258 9,524 11,611 11,500 3,643 3,005 5,641 5,141 6,106 9,738 1,108 8,006 Estimated Reserved GFA 16,256 9,528 8,526 14,186 6,993 1,753 2,587 13,939 3,008 8,909 1,539 10,563 Estimated FY20F Net profit (Rmb m) 44 50 59 60 36 12 32 48 23 61 8 56 Potential Market Capitalisation (HK$m) 592 597 789 721 335 185 575 299 374 799 132 617 * GFA under management and reserved GFA estimates will be replaced if developers have separately disclosed their GFA under management Source: Companies, DBS HK
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Appendix 1: Peers comparison and PE & PB charts
Peers comparison
9-J ul T arget Mk t EPS growth PE PE Yield Yield ROE ROE Net Price Price Rec Cap F iscal 19F 20F 19F 20F 19F 20F 19F 20F gearing Company Name Code HK$ HK$ US$m Yr % % x x % % % % % Country Garden Services* 6098 HK 17.98 20.18 BUY 6,146 Dec 26.0 31.3 34.1 26.0 0.7 1.0 34.7 29.6 Cash Greentown Ser.Gp.* 2869 HK 6.34 7.67 BUY 2,256 Dec 31.2 28.6 27.4 21.3 1.0 1.5 18.7 23.6 Cash A-Living Services 'H'* 3319 HK 14.08 17.91 BUY 2,404 Dec 25.4 23.4 16.0 13.0 1.6 1.9 18.0 19.4 Cash China Overseas Property 2669 HK 4.01 n.a. NR 1,690 Dec 29.5 25.9 25.4 20.2 1.2 1.6 38.0 35.9 Cash Colour Life Services Gp.* 1778 HK 5.25 6.77 BUY 893 Dec 22.0 22.0 10.0 8.2 4.2 5.1 18.2 19.6 19.9 S-Enjoy Service Group 1755 HK 5.85 n.a. NR 615 Dec 20.6 50.0 17.2 11.5 n.a. n.a. 24.5 29.7 Cash Ever Sunshine Lifestyle 1995 HK 3.5 n.a. NR 689 Dec 40.3 66.9 23.8 14.2 1.3 1.9 19.5 25.3 Cash Aoyuan Healthy Life Group 3662 HK 4.35 n.a. NR 405 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Cash Binjiang Service Group 3316 HK 7.2 n.a. NR 255 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Cash Riverine China Holdings 1417 HK 2.18 n.a. NR 113 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Cash Kaisa Property Holdings 2168 HK 14.04 n.a. NR 252 Dec 96.1 24.9 12.0 9.6 1.7 2.1 28.9 31.7 Cash Clifford Mod.Lvg.Hdg. 3686 HK 0.6 n.a. NR 78 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Cash Zhong Ao Home Group 1538 HK 0.66 n.a. NR 69 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Cash A v erage^ 36.4 34.1 20.7 15.5 1.7 2.2 25.1 26.8 19.9 ^ Excludes outliers Source: Thomson Reuters, *DBS HK
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A-Living Services - PE chart A-Living Services - PB chart
x x 3.5 22
20 3.0 +1SD: 2.7x
18 2.5 Avg: 2.4x +1SD: 16.4x 16 -1SD: 2x Avg: 14.1x 2.0 14 1.5 12 -1SD: 11.8x
10 1.0
Feb-18
Feb-19
Nov-18
Nov-19
Aug-18
Aug-19
Feb-18
Feb-19
May-18
May-19
Nov-18
Nov-19
Aug-18
Aug-19 May-18 May-19 Colour Life Services- PE chart Colour Life Services - PB chart
x x 9.0 70 8.0 60 7.0 50 6.0 5.0 +1SD: 4.4x 40 +1SD: 30.8x 4.0 30 Avg: 3x Avg: 19.8x 3.0 -1SD: 1.6x 20 2.0 -1SD: 8.8x 10 1.0
0 0.0
Jul-16
Jan-19
Jul-15
Jul-18
Jun-14
Jun-19
Feb-16
Oct-17
Apr-15
Sep-15
Dec-16
Nov-14
Nov-19
Jan-15
Jan-19
Mar-18
Jun-14
Jun-17
Aug-18
Oct-14
Feb-16
Oct-18
May-17
Apr-15
Sep-17
Apr-18
Apr-19
Dec-17
Nov-15
Nov-16
Nov-19
Mar-17
Aug-16 Aug-19 May-16
Source: Thomson Reuters, DBS HK
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Country Garden Services - PE chart Country Garden Services - PB chart
x x 9.0 35 8.5 8.0 30 7.5 +1SD: 7.4x +1SD: 26.9x 7.0 Avg: 6.6x 6.5 25 Avg: 24.5x 6.0 -1SD: 5.8x -1SD: 22.1x 5.5 20 5.0 4.5
15 4.0
Jun-18
Jun-19
Sep-18
Sep-19
Dec-18
Dec-19
Mar-19
Jun-18
Jun-19
Sep-18
Sep-19
Dec-18 Dec-19 Mar-19 Greentown Services - PE chart Greentown Services - PB chart
x x 9.0 40 8.0 35 +1SD: 30.4x 7.0 +1SD: 6.6x 30 Avg: 24.7x 6.0 Avg: 5.2x 25 5.0 -1SD: 19x 20 4.0 -1SD: 3.9x 15 3.0 10 2.0 5 1.0
0 0.0
Jul-16
Jul-18
Jul-19
Jan-18
Jul-16
Jul-18
Jul-19
Jun-17
Oct-17
Oct-18
Feb-17
Feb-19
Sep-16
Apr-17
Apr-19
Sep-19
Dec-18
Nov-16
Nov-19
Jan-18
Mar-18
Jun-17
Aug-17
Feb-17
Oct-17
Oct-18
Feb-19
May-18
Sep-16
Apr-17
Apr-19
Sep-19
Dec-18
Nov-16
Nov-19
Mar-18 Aug-17 May-18
Source: Thomson Reuters, DBS HK
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Appendix 2: Charging methods – Lump- larger projects, as they can leverage on economies of scale sum vs Commission-based to enhance efficiency and realise cost savings, which will accordingly feed directly into their overall profitability. This is also the preferred route for owners of residential properties, Charging methods – Lump-sum vs Commission-based as this arrangement enables property owners to delegate Property management service fees are typically charged as collective decision-making processes to property lump-sum basis or commission basis depending on the management companies, who can leverage on economies respective project and preferences of local of scale for better cost efficiency. authorities/property managers. Under a lump-sum basis, property management companies charge a pre-determined Commission-based is usually for smaller projects and management fee that is all-inclusive for basic property commercial properties with concentrated holdings. The management services offered to property owners and/or commission-based payment arrangement is generally property developers. Accordingly, property managers will preferred for smaller projects as it theoretically guarantees also bear all related costs. For commission-based projects, profitability (all related costs are supposedly borne by property managers essentially act as an agent to manage property owners/residents). It is also often the preferred the property projects and charge a commission fee (a route for commercial properties with concentrated percentage of the agreed property management fee), while ownership. Property owners usually take a more active role direct costs on the provision of property management in the management of these properties and property services will be borne by the property owner and/or property managers under this fee-charging model are normally developers from the remaining portion of property required to prepare budgets and accounts for property management fees. Any excess will be kept under a separate owners to review on a regular basis. reserve for future use pertaining to the managed project, while any shortfall will be borne by property owners.
Lump-sum typically preferred for larger projects and residential properties that are widely owned. From the perspective of property managers, lump-sum basis is often preferred for
Differences between Lump-sum and Commission-based projects
Lump sum based Commission based Revenue Management fee fully booked into P&L 8-10% of stated management fee booked into P&L as commission income COGS Incurred cost for property management services fully No direct cost on the provision of property management services booked into P&L as COGS to be charged under P&L Profit margin in P&L GPM typically lower at 10-30%; NPM similar GPM typically higher at 50%+; NPM similar
Balance Sheet Receivables and payables comprise mainly of management Receivables and payables separately discloses repayments on impact fees from property owners and payments to behalf of residents of commission-based communities, which supplers/subcontractors have a higher chance for making impairments in the event the property manager fails to collect suifficient payments to settle these outstanding payments Incentive for Preferred particularly for larger projects, where operating Preferred in smaller projects which in theory guarantees property manager efficiency is easier to obtain and helps to enhance profitability and supposedly are less affected by unprecedented profitability cost escalations Investor preference Preferred given clearer representation of operations and Less preferred as operational efficiency are hidden within projects. offers comparability to other property management Furthermore, projects are uncomparable among each other projects Property owners' No significant difference - arguably less preferred given No significant difference - arugably better off as property preference potential impact on service quality alongside cost saving managers does not have the incentive to save cost as long as measures total cost falls within the 90% of management fee (plus common area rental assistance income)
Source: DBS HK
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Appendix 3: Incentive schemes in place individual employee’s job scope. KPIs for management are generally more focused on profitability. For the latter, CGS We have listed the incentive schemes of our covered awarded a total of c.133m of pre-IPO share options to 15 counters here to gauge respective companies’ areas of focus individuals at an exercise price of HK$0.94 per share with a in their business operations. Overall, the most widely vesting schedule of 40%/30%/30% for FY18/19/20 (subject adopted incentive scheme is Key Performance Indicators to a 2-year lockup period upon exercise of option) upon the (KPIs) based on employees’ designation and job scope, fulfillment of a 25% growth in adjusted recurring earnings followed by share-based compensation plans. for FY18.
Incentive schemes in place Pre-IPO share options granted by CGS
KPI Share Share Actual share No. of Companies bonus option awards interests Name Position shares option Directors of the company A-Living Y N N Y Li Changjiang Executive Director 12,964,000 CGS Y Y N N Wu Bijun Non-Executive Director 12,964,000 Colour Life Y Y Y N Guo Zhangjun Executive Director 4,699,000 GTS Y Y N N Xiao Hua Executive Director 4,762,000 Source: Companies, DBS HK Subtotal 35,389,000
Senior management of the company A-Living – operationally focused. Unlike its peers, A-Living’s Gong Shunsong Chief Operating Officer 4,257,000 incentive scheme relies mainly on the award of bonuses Xu Binhuai Deputy General Manager 5,000,000 according to an employee’s ability to meet individual KPIs. Huang Peng Chief Financial Officer and While a pool of shares (6% of issued shares) has been 4,411,000 Joint Company Secretary allocated under a limited partnership structure for incentive Yu Xiangdong Deputy General Manager 4,884,000 compensation purposes, only a few selected senior Yuan Hongkai Deputy General Manager 4,591,000 management personnel are entitled to the pool (Mr. Huang Subtotal 23,143,000 Fengchao, CEO, General Manager and co-Chairman of the company; Mr. Feng Xin, Vice President; and Mr. Li Dalong, Others CFO), with actual plans for distribution of these benefits yet Mo Bin President of CG 38,892,000 to be finalised. Xie Shutai Deputy President of CG 19,446,000 Chen Yuhui General Manager of Beneficiaries of A-Living’s incentive share pool Operational Management 3,769,000 Center of CG Property Services A -Living Xia Xiaonan General Manager of (3319 HK) Administrative Management Cener and Overseas 4,465,000 Department of CG Property 6.0% Services Wang Cuiqin General Manager of External 0.1% Gongqingcheng Gongqingcheng Yagao Investment Development and 3,931,000 Investment Management Management Department of (General Partner) CG Property Services Wang Yingwu Deputy General Manager of 3,913,000 25% 49.9% 25% CG Property Services Subtotal 74,416,000 Mr. Feng Xin Mr. Huang Feng Mr. Li Dalong (Vice president) Chao (CEO, GM) (CFO) Total no. of share options granted 132,948,000 (Limited Partner) (Limited Partner) (Limited Partner) Source: Company, DBS HK Source: Company, DBS HK
Colour Life – share price performance driven. Aside from CGS – earnings growth and profitability as core focus. Like the company’s implementation of KPIs on individual majority of its peers, CGS’s incentive scheme mainly consists employees, Colour Life has a sizeable amount of share- of bonuses based on individual KPIs and pre-IPO share related compensation schemes that have been gradually options. For the former, KPIs are set according to an awarded since 2014 to both senior management and
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selected employees, which points to a focus on share price Share options granted by GTS performance. The company issued a total of 104m share options at respective exercise prices with vesting conditions Name Position No. of shares listed below. Additionally, the company adopted a share Li Hairong Executive Director, Chairman and 800,000 award scheme and has allocated a total of HK$25m for the substantial shareholder acquisition of the shares. The grant of these shares is subject Yang Zhangfa Executive Director and Vice 3,000,000 to the discretion of the CEO and the Chief Human Resource Chairman Wu Zhihua Executive Director, CEO and CFO 4,500,000 Officer. Chen Hao Executive Director 2,500,000 Share options granted by Colour Life Jin Keli Chief Operating Officer 2,250,000 Weng Yafei Chief Quality Officer 1,750,000 Date of No. of Exercise Xu Yaping Chief Marketing Officer 1,750,000 issuance shares price (HK$) Vesting condition Sep-14 20,000,000 6.66 1/3 on the date of Yuan Weidong Chief Technology Officer 1,450,000 issuance; 1/3 on each of Zhou Hong Chief Security Officer 1,250,000 anniversairies from date of Other employees 114,250,000 issuance Sep-14 25,000,000 6.66 1/3 on each of anniversaries Total share options issued 133,500,000
from date of issuance Source: Company, DBS HK
Apr-15 25,000,000 10.88 Meeting specific performance targets; 1/3 on We have focused mainly on property managers’ share-based each of anniversaries from compensation schemes when assessing the competitiveness date of issuance of each property manager’s incentive scheme, as KPI-related Mar-16 34,247,488 5.76 Meeting specific compensation is generally largely similar among the performance targets; 1/3 on companies and lack common indicators for the purpose of each of anniversaries from comparison. date of issuance
Nov-18* 19,464,720 4.11 Meeting specific To measure the attractiveness, we assessed the incentive performance targets; 1/3 on schemes based on three criteria: 1) ability to stimulate future each of anniversaries from performance; 2) attractiveness of share options; and 3) date of issuance impact of incentive scheme on the overall company. *Reallocation of share options that lapsed (failed to meet performance targets) or previously held by employees who have since resigned Source: Company, DBS HK Criteria 1: Ability to stimulate future performances
For the first criteria, we looked at the value of outstanding GTS – growing focus on share price performance. share options that remain unvested and require specific Previously, GTS mainly relied on giving out bonuses performance targets to be met before those entitled according to employees meeting their respective sets of individuals can exercise their options. KPIs. In Sep-2018, GTS rolled out its share option scheme and awarded a total of 133.5m share options at an exercise price of HK$6.116 per share with a vesting schedule of 33%/33%/34% in Sep-19/Sep-20/Sep-21 upon the fulfilment of stipulated performance targets. Over time, this should gradually transform into increased attention on the company’s share price performance.
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Market value of unvested options that require specific Criteria 3: Impact of incentive scheme at the company level performance targets to be met For the last criteria, we looked at the percentage of Consideration of share options (HK$m) unvested share options held by general employees of the 900 company. 800
700 % of unvested share options held by general employees 600 of the company 500 100% 400 90% 300 80% 200 70% 100 60% 0 GTS Colour Life 50%
40% Note: Based on closing prices of 9 Jul 2019 *CGS’s unvested options require a 25% increase in recurring net 30% profit, for FY18 which has already been achieved 20% **A-Living has no share option scheme in place Source: Companies, DBS HK 10% 0% Colour Life GTS CGS Criteria 2: Attractiveness of share options *A-Living has no share option scheme in place Source: Companies, DBS HK To measure the attractiveness of the share options, we calculate the differential between the counter’s current market value to the value of the option calculated based on the stated exercise price. Overall score
Difference of share option value at exercise price versus Company Ability to Attractiveness % of A v erage current market value in order to exercise value of stimulate of incentive distribution score unvested options future scheme to general performance employ ee Value differential (x) GTS 1 2 2 1.7 Colour Life 2 3 1 2.0 2.0 18.0 18.1 CGS 3 1 3 2.3 A-Living 4 4 4 4.0 1.5 Source: DBS HK
1.0 GTS has the most competitive incentive scheme in place, 0.5 followed by Colour Life. Under our defined criteria, we identified the incentive scheme launched by GTS as the 0.0 most competitive among peers, followed by Colour Life. CGS lagged behind as the company has already achieved -0.5 the requirement of 25% growth in FY18 recurring earnings, CGS GTS Colour Life as well as the fact that its share option scheme was not
extended to general employees. A-Living was less Note: Based on closing prices of 9 Jul 2019 *Colour Life’s unvested options are estimated based on the reported competitive compared to peers as its share incentive scheme numbers in its 2018 interim report remains largely at a preliminary stage with no definitive **A-Living has no share option scheme in place policies at the moment and its incentive pool of shares is Source: Companies, DBS HK only available to top management personnel and are domestic shares that are currently not tradeable in Hong Kong.
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Country Garden Services Holdings (6098 HK Equity, HK$17.98, BUY, Target Price 12-mth HK$ 20.18) Forecast & Valuation General Data FY Dec (RMB m) 2017A 2018A 2019F 2020F At A Glance Turnover 3,122 4,675 6,863 9,752 Issued Capital (m shrs) 2,669 EBITDA 592 1,047 1,485 2,050 Pre-tax Profit 608 1,069 1,549 2,143 Mkt Cap (HK$m/US$m) 47,984 / 6,146 Net Profit 402 923 1,240 1,630 Major Shareholders (%) Net Pft (Pre Ex) (core profit) 402 923 1,240 1,630 Yang (Huiyan) 54.1 Net Profit Gth (Pre-ex) (%) 23.9 129.8 34.3 31.5 Free Float (%) 45.9 EPS (RMB) 0.16 0.37 0.47 0.61 3m Avg. Daily Val. (US$m) 12.76 EPS (HK$) 0.18 0.42 0.53 0.69 EPS Gth (%) N/A 129.8 26.0 31.3 Diluted EPS (HK$) 0.18 0.42 0.53 0.69 DPS (HK$) 0.00 0.10 0.13 0.17 BV Per Share (HK$) 0.64 1.02 2.08 2.60 PE (X) 98.7 43.0 34.1 26.0 P/Cash Flow (X) 44.8 25.6 22.4 17.8 P/Free CF (X) 48.1 36.9 27.0 17.8 EV/EBITDA (X) 62.7 34.3 23.9 16.3 Net Div Yield (%) 0.0 0.6 0.7 1.0 P/Book Value (X) 27.9 17.5 8.6 6.9 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 32.9 50.1 34.7 29.6
Earnings Rev (%): Nil Nil Consensus EPS (RMB) 0.47 0.61 Other Broker Recs: B:17 S:0 H:4
Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Turnover 3,122 4,675 6,863 9,752 Net Fixed Assets 79 113 87 62 Cost of Goods Sold (2,086) (2,914) (4,311) (6,173) Invts in Assocs & JVs 18 27 353 353 Gross Profit 1,036 1,762 2,552 3,579 Other LT Assets 25 711 706 700 Other Opg (Exp)/Inc (454) (749) (1,098) (1,560) Cash & ST Invts 2,637 3,874 6,930 9,030 Operating Profit 581 1,012 1,454 2,019 Inventory 6 8 12 18 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 712 788 1,144 1,625 Associates & JV Inc (8) 3 0 0 Other Current Assets 0 0 0 0 Net Interest (Exp)/Inc 35 54 96 124 Total Assets 3,477 5,522 9,232 11,788 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 0 0 0 0 Pre-tax Profit 608 1,069 1,549 2,143 Other Current Liab 1,921 3,127 4,186 5,500 Tax (168) (135) (294) (493) LT Debt 0 0 0 0 Minority Interest (39) (11) (15) (20) Other LT Liabilities 14 65 65 65 Preference Dividend 0 0 0 0 Shareholder’s Equity 1,421 2,261 4,897 6,120 Net Profit 402 923 1,240 1,630 Minority Interests 121 69 84 103 Net profit before Except. 402 923 1,240 1,630 Total Cap. & Liab. 3,477 5,522 9,232 11,788 EBITDA 592 1,047 1,485 2,050 Sales Gth (%) 32.4 49.8 46.8 42.1 Non-Cash Wkg. Cap (1,202) (2,331) (3,030) (3,857) EBITDA Gth (%) 22.2 76.7 41.9 38.0 Net Cash/(Debt) 2,637 3,874 6,930 9,030 Opg Profit Gth (%) 21.7 74.2 43.6 38.9 Effective Tax Rate (%) 27.6 12.6 19.0 23.0 Cash Flow Statement (RMB m) Segmental Breakdown (RMB m) / Key Assumptions FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Pre-Tax Profit 608 1,069 1,549 2,143 Revenues (RMB m) Dep. & Amort. 19 31 31 31 Property Management 2,545 3,445 5,105 7,225 Tax Paid (151) (113) (294) (493) Services Assoc. & JV Inc/(loss) 8 (3) 0 0 Value-added services to non- 242 417 633 963 (Pft)/ Loss on disposal of FAs 0 0 0 0 property owners ChgFAFAsiaries/Investments in Wkg.Cap. (-/+) 436 617 699 827 Value-added services to 328 791 1,102 1,540 Other Operating CF (35) (52) (96) (124) property owners Net Operating CF 885 1,549 1,890 2,384 Other services 7 21 23 24 Capital Exp.(net) (61) (474) (326) 0 Total 3,122 4,675 6,863 9,752 Other Invts.(net) 0 (11) 0 0 Invts in Assoc. & JV (7) 333 0 0 Key Assumptions Div from Assoc & JV 0 0 0 0 Average property (0.1) 0.1 0.0 Other Investing CF 35 38 96 124 management fee growth (%) Net Investing CF (32) (114) (230) 124 Div Paid 0 (94) (310) (408) Average GFA conversion rate 2.4 2.4 2.4 Chg in Gross Debt (3) 0 0 0 for new projects from 3rd party Capital Issues 0 2 1,706 0 (years) Other Financing CF 10 (108) 0 0 Net Financing CF 7 (200) 1,396 (408) Average GFA conversion rate 3.2 3.2 3.2 Currency Adjustments 0 0 0 0 for projects from CG (years) Chg in Cash 860 1,235 3,056 2,100
Source: Company, DBS HK
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Greentown Service Group (2869 HK Equity, HK$6.34, BUY, Target Price 12-mth HK$ 7.67) Forecast & Valuation General Data FY Dec (RMB m) 2017A 2018A 2019F 2020F At A Glance Turnover 5,140 6,710 8,755 11,070 Issued Capital (m shrs) 2,778 EBITDA 530 692 754 1,008 Pre-tax Profit 509 629 678 937 Mkt Cap (HK$m/US$m) 17,611 / 2,256 Net Profit 387 483 464 672 Major Shareholders (%) Net Pft (Pre Ex) (core profit) 383 433 568 730 Orchid Garden Investment Co., Ltd. 36.7 Net Profit Gth (Pre-ex) (%) 35.4 12.9 31.2 28.6 Li (Hairong) 20.3 EPS (RMB) 0.14 0.17 0.17 0.24 EPS (HK$) 0.16 0.20 0.19 0.27 Free Float (%) 43.0 Core EPS (HK$) 0.16 0.18 0.23 0.30 3m Avg. Daily Val. (US$m) 3.21 Core EPS (RMB) 0.14 0.16 0.20 0.26 EPS Gth (%) 15.7 24.7 (4.0) 44.9 Core EPS Gth (%) 15.4 12.9 31.2 28.6 Diluted EPS (HK$) 0.16 0.18 0.23 0.30 DPS (HK$) 0.05 0.07 0.07 0.10 BV Per Share (HK$) 0.78 0.95 1.07 1.25 PE (X) 40.1 32.2 33.5 23.1 Core PE (X) 40.5 35.9 27.4 21.3 P/Cash Flow (X) 29.4 23.7 78.9 20.3 P/Free CF (X) 37.8 32.2 78.9 20.3 EV/EBITDA (X) 25.7 19.2 18.0 12.9 Net Div Yield (%) 0.9 1.1 1.0 1.5 P/Book Value (X) 8.1 6.7 5.9 5.1 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 21.3 22.8 18.7 23.6
Earnings Rev (%): Nil Nil Consensus EPS (RMB) 0.22 0.28 Other Broker Recs: B:16 S:0 H:7 Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Turnover 5,140 6,710 8,755 11,070 Net Fixed Assets 304 372 321 271 Cost of Goods Sold (4,194) (5,512) (7,163) (9,035) Invts in Assocs & JVs 559 218 540 540 Gross Profit 946 1,198 1,592 2,035 Other LT Assets 341 916 886 856 Other Opg (Exp)/Inc (462) (681) (919) (1,107) Cash & ST Invts 1,990 2,329 2,369 2,907 Operating Profit 485 516 673 928 Inventory 128 291 380 481 Other Non Opg (Exp)/Inc 5 95 0 0 Debtors 790 1,202 1,592 2,013 Associates & JV Inc 0 0 0 0 Other Current Assets 29 16 16 16 Net Interest (Exp)/Inc 19 18 5 9 Total Assets 4,140 5,344 6,104 7,083 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 0 1 324 324 Pre-tax Profit 509 629 678 937 Other Current Liab 2,138 2,921 3,053 3,588 Tax (117) (163) (210) (258) LT Debt 0 0 0 0 Minority Interest (5) 18 (5) (7) Other LT Liabilities 10 17 17 17 Preference Dividend 0 0 0 0 Shareholder’s Equity 1,918 2,329 2,630 3,067 Net Profit 387 483 464 672 Minority Interests 74 76 81 87 Net profit before Except. 383 433 568 730 Total Cap. & Liab. 4,140 5,344 6,104 7,083 EBITDA 530 692 754 1,008 Sales Gth (%) 38.1 30.5 30.5 26.4 Non-Cash Wkg. Cap (1,192) (1,412) (1,065) (1,079) EBITDA Gth (%) 21.9 30.4 9.0 33.8 Net Cash/(Debt) 1,990 2,328 2,045 2,583 Opg Profit Gth (%) 16.2 6.5 30.4 37.9 Effective Tax Rate (%) 23.0 26.0 30.9 27.6 Cash Flow Statement (RMB m) Segmental Breakdown (RMB m) / Key Assumptions FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Pre-Tax Profit 509 629 678 937 Revenues (RMB m) Dep. & Amort. 40 81 81 81 Property Management 3,560 4,461 5,844 7,576 Tax Paid (101) (109) (210) (258) Services Assoc. & JV Inc/(loss) (8) 21 0 0 Property Consulting Services 680 939 1,177 1,287 (Pft)/ Loss on disposal of FAs (4) (113) 0 0 Community Living Services 900 1,310 1,734 2,208 ChgFAFAsiaries/Investments in Wkg.Cap. (-/+) 75 116 (347) 14 Total 5,140 6,710 8,755 11,070 Other Operating CF 16 31 (5) (9) Net Operating CF 529 656 197 764 Key Assumptions Capital Exp.(net) (117) (173) 0 0 Average property 0.0 0.0 Other Invts.(net) (477) (24) 0 0 management fee growth (%) Invts in Assoc. & JV (172) (22) (323) 0 Average GFA conversion rate 3.0 3.0 Div from Assoc & JV 0 0 0 0 (years) Other Investing CF 16 20 18 22 Net Investing CF (750) (199) (304) 22 Div Paid (100) (134) (162) (235) Chg in Gross Debt 0 1 323 0 Capital Issues 0 0 0 0 Other Financing CF 82 7 (13) (13) Net Financing CF (18) (126) 147 (248) Currency Adjustments (53) 6 0 0 Chg in Cash (292) 337 40 538 Source: Company, DBS HK
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Colour Life Services Group Co Ltd (1778 HK Equity, HK$5.25, BUY, Target Price 12-mth HK$ 6.77) Forecast & Valuation General Data FY Dec (RMB m) 2017A 2018A 2019F 2020F At A Glance Turnover 1,629 3,614 4,456 5,413 Issued Capital (m shrs) 1,329 EBITDA 614 1,175 1,305 1,495 Pre-tax Profit 457 670 879 1,073 Mkt Cap (HK$m/US$m) 6,975 / 893 Net Profit 321 485 608 742 Major Shareholders (%) Net Pft (Pre Ex) (core profit) 321 485 608 742 Fantasia Holdings Group Co Ltd 55.4 Net Profit Gth (Pre-ex) (%) 70.8 51.3 25.4 22.0 Splendid Fortune (CEO Mr. Tang) 16.3 EPS (RMB) 0.32 0.38 0.46 0.56 EPS (HK$) 0.36 0.43 0.52 0.64 Free Float (%) 28.3 EPS Gth (%) 71.4 17.7 22.0 22.0 3m Avg. Daily Val. (US$m) 1.66 Diluted EPS (HK$) 0.36 0.43 0.52 0.64 DPS (HK$) 0.14 0.18 0.22 0.27 BV Per Share (HK$) 2.93 2.78 3.05 3.47 PE (X) 14.4 12.2 10.0 8.2 P/Cash Flow (X) 33.0 11.3 9.8 6.3 P/Free CF (X) nm 11.7 9.8 6.3 EV/EBITDA (X) 8.7 5.7 4.9 3.8 Net Div Yield (%) 2.6 3.5 4.2 5.1 P/Book Value (X) 1.8 1.9 1.7 1.5 Net Debt/Equity (X) 0.2 0.2 0.1 CASH ROAE (%) 13.2 14.8 18.2 19.6
Earnings Rev (%): Nil Nil Consensus EPS (RMB) 0.47 0.57 Other Broker Recs: B:14 S:0 H:2
Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Turnover 1,629 3,614 4,456 5,413 Net Fixed Assets 310 360 291 221 Cost of Goods Sold (898) (2,331) (2,894) (3,550) Invts in Assocs & JVs 69 143 143 143 Gross Profit 731 1,282 1,562 1,864 Other LT Assets 3,784 3,780 3,643 3,507 Other Opg (Exp)/Inc (188) (281) (463) (575) Cash & ST Invts 2,225 3,013 2,740 3,454 Operating Profit 542 1,002 1,099 1,289 Inventory 7 5 6 7 Other Non Opg (Exp)/Inc 3 (43) 0 0 Debtors 1,049 1,556 1,869 2,225 Associates & JV Inc 2 11 0 0 Other Current Assets 1,367 1,210 1,210 1,210 Net Interest (Exp)/Inc (90) (299) (220) (216) Total Assets 8,812 10,066 9,902 10,767 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 733 1,753 1,711 1,659 Pre-tax Profit 457 670 879 1,073 Other Current Liab 2,117 2,841 2,953 3,322 Tax (106) (152) (220) (268) LT Debt 2,117 1,907 1,217 1,217 Minority Interest (30) (33) (51) (63) Other LT Liabilities 340 310 310 310 Preference Dividend 0 0 0 0 Shareholder’s Equity 3,399 3,135 3,539 4,025 Net Profit 321 485 608 742 Minority Interests 106 121 172 235 Net profit before Except. 321 485 608 742 Total Cap. & Liab. 8,812 10,066 9,902 10,767 EBITDA 614 1,175 1,305 1,495 Sales Gth (%) 21.4 121.9 23.3 21.5 Non-Cash Wkg. Cap 306 (70) 132 120 EBITDA Gth (%) 58.7 91.5 11.1 14.5 Net Cash/(Debt) (625) (647) (188) 579 Opg Profit Gth (%) 64.5 84.7 9.7 17.3 Effective Tax Rate (%) 23.2 22.7 25.0 25.0 Cash Flow Statement (RMB m) Segmental Breakdown (RMB m) / Key Assumptions FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Pre-Tax Profit 457 670 879 1,073 Revenues (RMB m) Dep. & Amort. 67 206 206 206 Property Management 1,231 3,064 3,758 4,583 Tax Paid (79) (177) (220) (268) Services Assoc. & JV Inc/(loss) (2) (11) 0 0 Engineering Services 121 141 148 159 (Pft)/ Loss on disposal of FAs 3 0 0 0 Community value-added 277 408 550 671 ChgFAFAsiaries/Investments in Wkg.Cap. (-/+) (400) (454) (202) 12 services Other Operating CF 93 292 (42) (53) Total 1,629 3,614 4,456 5,413 Net Operating CF 140 526 622 971 Capital Exp.(net) (180) (18) 0 0 Key Assumptions Other Invts.(net) 1,058 110 0 0 Average property (0.1) (0.1) Invts in Assoc. & JV 0 0 0 0 management fee growth (lump Div from Assoc & JV 0 0 0 0 sum basis) (%) Other Investing CF 116 31 0 0 Average property 0.0 0.0 Net Investing CF 994 122 0 0 management fee growth Div Paid (87) (166) (205) (257) (commission basis) (%) Chg in Gross Debt 158 757 (690) 0 Average GFA conversion rate 2.9 2.9 Capital Issues 0 428 0 0 for new projects (years) Other Financing CF (112) (848) 0 0 Net Financing CF (41) 171 (895) (257) Currency Adjustments 0 0 0 0 Chg in Cash 1,093 819 (273) 714
Source: Company, DBS HK
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A-Living Group Limited (3319 HK Equity, HK$14.08, BUY, Target Price 12-mth HK$ 17.91) Forecast & Valuation General Data FY Dec (RMB m) 2017A 2018A 2019F 2020F At A Glance Turnover 1,761 3,377 5,107 6,488 Issued Capital (m shrs) 433 EBITDA 414 1,110 1,454 1,787 Pre-tax Profit 403 1,075 1,420 1,753 - Non H shrs (m shs) 900 Net Profit 290 801 1,033 1,276 Mkt Cap (HK$m/US$m) 18,773 / 2,404 Net Pft (Pre Ex) (core profit) 290 801 1,033 1,276 Major Shareholders (%) Net Profit Gth (Pre-ex) (%) 80.3 176.5 29.0 23.4 Agile Group. 54.0 EPS (RMB) 0.35 0.62 0.77 0.96 EPS (HK$) 0.39 0.70 0.88 1.08 Greenland Group 15.0 EPS Gth (%) 56.0 77.5 25.4 23.4 Free Float (%) 31.0 Diluted EPS (HK$) 0.39 0.70 0.88 1.08 3m Avg. Daily Val. (US$m) 4.25 DPS (HK$) 0.00 0.35 0.22 0.27 BV Per Share (HK$) 2.00 4.74 5.15 6.01 PE (X) 35.7 20.1 16.0 13.0 P/Cash Flow (X) 36.0 18.2 16.6 15.7 P/Free CF (X) 40.1 18.7 16.6 15.7 EV/EBITDA (X) 22.9 10.3 8.1 6.6 Net Div Yield (%) 0.0 2.5 1.6 1.9 P/Book Value (X) 7.0 3.0 2.7 2.3 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 33.1 23.2 18.0 19.4
Earnings Rev (%): Nil Nil Consensus EPS (RMB) 0.79 1.04 Other Broker Recs: B:19 S:0 H:0
Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Turnover 1,761 3,377 5,107 6,488 Net Fixed Assets 71 80 70 60 Cost of Goods Sold (1,170) (2,087) (3,248) (4,159) Invts in Assocs & JVs 0 0 0 0 Gross Profit 591 1,290 1,859 2,329 Other LT Assets 1,041 1,228 1,722 2,449 Other Opg (Exp)/Inc (192) (214) (438) (576) Cash & ST Invts 880 4,809 4,888 4,935 Operating Profit 398 1,076 1,420 1,753 Inventory 17 15 51 65 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 488 1,165 1,891 2,403 Associates & JV Inc 0 0 0 0 Other Current Assets 13 0 0 0 Net Interest (Exp)/Inc 4 (1) 0 0 Total Assets 2,511 7,297 8,623 9,912 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 0 0 0 0 Pre-tax Profit 403 1,075 1,420 1,753 Other Current Liab 1,015 1,726 2,387 2,620 Tax (102) (264) (355) (438) LT Debt 0 0 0 0 Minority Interest (10) (10) (32) (39) Other LT Liabilities 22 60 60 60 Preference Dividend 0 0 0 0 Shareholder’s Equity 1,472 5,422 6,056 7,073 Net Profit 290 801 1,033 1,276 Minority Interests 2 88 120 159 Net profit before Except. 290 801 1,033 1,276 Total Cap. & Liab. 2,511 7,297 8,623 9,912 EBITDA 414 1,110 1,454 1,787 Sales Gth (%) 41.5 91.8 51.2 27.1 Non-Cash Wkg. Cap (496) (546) (445) (152) EBITDA Gth (%) 85.2 168.1 31.0 22.9 Net Cash/(Debt) 880 4,809 4,888 4,935 Opg Profit Gth (%) 83.5 170.1 32.0 23.4 Effective Tax Rate (%) 25.5 24.6 25.0 25.0 Cash Flow Statement (RMB m) Segmental Breakdown (RMB m) / Key Assumptions FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Pre-Tax Profit 403 1,075 1,420 1,753 Revenues (RMB m) Dep. & Amort. 16 33 33 33 Property Management 1,206 1,625 2,572 3,250 Tax Paid (76) (143) (355) (438) Services Assoc. & JV Inc/(loss) 0 0 0 0 Value-added services to non- 453 1,463 2,022 2,496 (Pft)/ Loss on disposal of FAs 0 0 0 0 property owners FAFAsiariesChg in Wkg.Cap./Investments (-/+) (43) (51) (101) (293) Value-added services to 102 289 513 743 Other Operating CF (12) (31) 0 0 property owners Net Operating CF 287 883 997 1,056 Total 1,761 3,377 5,107 6,488 Capital Exp.(net) (29) (20) 0 0 Key Assumptions Other Invts.(net) (981) (116) (518) (750) (0.3) 0.0 0.0 Average property Invts in Assoc. & JV 0 0 0 0 management fee growth (%) Div from Assoc & JV 0 0 0 0 Other Investing CF 1,060 24 0 0 4.0 4.0 4.0 Average GFA conversion rate Net Investing CF 49 (112) (518) (750) for new projects from 3rd Div Paid 0 0 0 0 party/Greenland (years) Chg in Gross Debt (809) (12) 0 0 Capital Issues 1,199 3,313 0 0 4.0 4.0 4.0 Average GFA conversion rate Other Financing CF (370) (144) (400) (258) for projects from Agile (years) Net Financing CF 20 3,157 (400) (258) Currency Adjustments 0 0 0 0 Chg in Cash 357 3,928 79 47
Source: Company, DBS HK
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DBS HK recommendations are based on an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return, i.e., > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame)
*Share price appreciation + dividends
Completed Date: 10 Jul 2019 12:29:38 (HKT) Dissemination Date: 10 Jul 2019 18:55:29 (HKT) Sources for all charts and tables are DBS HK unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank (Hong Kong) Limited (“DBS HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS HK, DBS Vickers (Hong Kong) Limited (“DBSV HK”), and DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”), its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS HK.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
DBS Vickers Securities (USA) Inc (“DBSVUSA”), a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
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ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates have a proprietary position in Country Garden Services Holdings Co Ltd (6098 HK) and China Overseas Property Holdings Ltd (2669 HK) recommended in this report as of 08 Jul 2019.
2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
3. Compensation for investment banking services: DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Central China Real Estate Ltd (832 HK), China Resources Land Ltd (1109 HK), China South City Holdings Ltd (1668 HK), Sino-Ocean Group Holding Ltd (3377 HK), Minmetals Land Ltd (230 HK) and Hopson Development Holdings Ltd (754 HK) as of 30 Jun 2019.
4. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Central China Real Estate Ltd (832 HK), China Resources Land Ltd (1109 HK), China South City Holdings Ltd (1668 HK), Sino-Ocean Group Holding Ltd (3377 HK), Minmetals Land Ltd (230 HK) and Hopson Development Holdings Ltd (754 HK) in the past 12 months, as of 30 Jun 2019.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
5. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBS HK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia This report is being distributed in Australia by DBS Bank Ltd, DBSVS or DBSV HK. DBS Bank Ltd holds Australian Financial Services Licence no. 475946. DBSVS and DBSV HK are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS Bank Ltd and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSV HK is regulated by the Hong Kong Securities and Futures Commission under the laws of Hong Kong, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited, all of which are registered with or licensed by the Hong Kong Securities and Futures Commission to carry out the regulated activity of advising on securities.
Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia. Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report. Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. United This report is produced by DBS HK which is regulated by the Hong Kong Monetary Authority
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In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at units 608-610, 6th Floor, Gate International Precinct Building 5, PO Box 506538, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Financial Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for Centre professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
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United Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined Emirates in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent. United States This report was prepared by DBS HK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate. Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Bank (Hong Kong) Limited 13 th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong Tel: (852) 3668-4181, Fax: (852) 2521-1812
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DBS Regional Research Offices
HONG KONG MALAYSIA SINGAPORE DBS Bank (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Carol Wu Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 13th Floor One Island East, 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 18 Westlands Road, Capital Square, Marina Bay Financial Centre Tower 3 Quarry Bay, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 3668 4181 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 852 2521 1812 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] e-mail: [email protected] Company Regn. No. 196800306E
INDONESIA THAILAND PT DBS Vickers Sekuritas (Indonesia) DBS Vickers Securities (Thailand) Co Ltd Contact: Maynard Priajaya Arif Contact: Chanpen Sirithanarattanakul DBS Bank Tower 989 Siam Piwat Tower Building, Ciputra World 1, 32/F 9th, 14th-15th Floor Jl. Prof. Dr. Satrio Kav. 3-5 Rama 1 Road, Pathumwan, Jakarta 12940, Indonesia Bangkok Thailand 10330 Tel: 62 21 3003 4900 Tel. 66 2 857 7831 Fax: 6221 3003 4943 Fax: 66 2 658 1269 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand
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