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Greentown Service Deutsche Bank Research Rating Company Date 9 July 2018 Hold Greentown Service Initiation of Coverage Asia China Reuters Bloomberg Exchange Ticker Price at 5 Jul 2018 (HKD) 6.62 Property 2869.HK 2869 HK HSI 2869 Price target - 12mth (HKD) 7.39 Property 52-week range (HKD) 8.20 - 3.80 HANG SENG INDEX 28,182 A high-end national player with strong Jeffrey Gao, CFA Jason Ching, CFA VAS growth; Hold for fair valuation Research Analyst Research Analyst (+852 ) 2203 6256 (+852 ) 2203 6205 National player with strong quality services growth; initiate with Hold [email protected] [email protected] We initiate Greentown Service with a Hold rating and TP of HKD7.39. Leveraging on its brand name, with quality services for high-end residential Stephen Cheung, CFA projects, we believe the growth visibility of the company is high amid the ongoing consumption upgrade in China. We expect the company to deliver Research Analyst 26% earnings CAGR (22-24% ROE) in FY18-20F, assuming: 1) GFA under (+852 ) 2203 6182 management to double by 2020F; 2) VAS revenue to triple; but 3) overall [email protected] margin may continue to narrow. Also, we believe its valuation, at 28x 12m forward P/E (24x net-cash adjusted) and 1.1x PEG, is fair (highest in sector). Foo Leung Stable property management services growth with margin expansion Research Associate The company manages 138mn sqm as of end-2017 with an average (+852 ) 2203 6239 management fee of RMB3.11/sqm/month. We expect GFA under management [email protected] to double to 287mn sqm in 2020F, considering: 1) quality services to obtain third-party projects (>70% winning bid rate); 2) 150mn sqm reserve GFA; and Price/price relative 3) rich cash (RMB2.0bn in 2017) for potential M&A. Also, we expect this segment’s margin to expand mildly in the next few years, given increasing 9 property management fees and automation measures to reduce labour cost. 8 6 Strong value-added services growth, but margin may continue to compress 5 The revenue from VAS has posted a 37% CAGR since 2013, and we expect it 3 to triple by 2020F, given the strong growth of its community living services. 2 However, we believe the margin of this segment may continue to compress in 7/16 1/17 7/17 1/18 the medium term, given the aggressive expansion of its community products Greentown Service HANG SENG INDEX (Rebased) and services (low-margin business), property asset management services (high start-up costs), and cultural and education services (currently loss making). Performance (%) 1m 3m 12m 26% earnings CAGR, high ROE and strong operating cash flow Absolute -18.8 -0.5 61.5 We forecast a 26% earnings CAGR in the next three years (driven by strong HANG SENG INDEX -9.4 -4.5 10.4 revenue growth and overall stable net margin), implying 22-26% ROE. Also, we Source: Deutsche Bank expect its cash position to reach RMB3.4bn in 2020F (+70% from 2017), given the company’s positive operating cash flow (due to a high management fee collection rate of ~99%) can fully cover its dividend and capex. Valuation and risks (see p22) Our TP is based on discounted FCFE estimates with a 3% terminal growth rate. The stock now trades at 28x 12-month forward P/E and 6.9x FY18F P/B. Key upside risk – higher margins due to effective cost control; key downside risk – weaker growth of its GFA under management and value-added services. Forecasts And Ratios Year End Dec 31 2016A 2017A 2018E 2019E 2020E Sales (CNYm) 3,722.0 5,140.1 6,773.6 8,997.7 11,837.6 DB EPS FD (CNY) 0.13 0.14 0.18 0.22 0.28 DB EPS growth (%) 21.7 6.1 27.9 24.6 26.1 PER (x) 18.1 25.1 31.4 25.2 20.0 DPS (net) (CNY) 0.04 0.05 0.07 0.08 0.11 Yield (net) (%) 1.5 1.5 1.2 1.5 1.9 Source: Deutsche Bank estimates, company data ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Distributed on: 08/07/2018 22:00:00 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 091/04/2018. 7T2se3r0Ot6kwoPa 9 July 2018 Property Greentown Service Model updated:05 July 2018 Fiscal year end 31-Dec 2015 2016 2017 2018E 2019E 2020E Running the numbers Financial Summary Asia DB EPS (CNY) 0.11 0.13 0.14 0.18 0.22 0.28 Reported EPS (CNY) 0.10 0.12 0.14 0.18 0.22 0.28 China DPS (CNY) 0.00 0.04 0.05 0.07 0.08 0.11 BVPS (CNY) 0.1 0.6 0.7 0.8 1.0 1.2 Property Weighted average shares (m) 2,000 2,368 2,778 2,778 2,778 2,778 Greentown Service Average market cap (CNYm) na 5,624 9,708 15,565 15,565 15,565 Enterprise value (CNYm) na 3,228 7,091 12,546 12,127 11,641 Reuters: 2869.HK Bloomberg: 2869 HK Valuation Metrics P/E (DB) (x) na 18.1 25.1 31.4 25.2 20.0 Hold P/E (Reported) (x) na 19.7 25.1 31.4 25.2 20.0 Price (5 Jul 18) HKD 6.62 P/BV (x) 0.00 3.60 7.69 6.87 5.78 4.81 Target Price HKD 7.39 FCF Yield (%) na 5.5 4.4 3.5 3.9 4.6 Dividend Yield (%) na 1.5 1.5 1.2 1.5 1.9 52 Week range HKD 3.80 - 8.20 EV/Sales (x) nm 0.9 1.4 1.9 1.3 1.0 Market Cap (m) HKDm 18,389 EV/EBITDA (x) nm 7.7 14.6 19.6 15.2 11.6 EV/EBIT (x) nm 7.7 14.6 19.6 15.2 11.6 USDm 2,343 Income Statement (CNYm) Company Profile Sales revenue 2,919 3,722 5,140 6,774 8,998 11,838 Greentown Service is a leading living service provider Gross profit 531 716 946 1,174 1,489 1,905 nationwide, providing services contains property service, EBITDA 284 417 485 639 796 1,005 community service and consulting service. As of end- Depreciation 0 0 0 0 0 0 2017, the company got GFA of 138msqm under Amortisation 0 0 0 0 0 0 management and GFA of 150msqm in reserve. EBIT 284 417 485 639 796 1,005 Net interest income(expense) -7 -2 19 20 24 28 Associates/affiliates 2 3 8 10 13 18 Exceptionals/extraordinaries 0 0 0 0 0 0 Other pre-tax income/(expense) 0 0 -2 0 0 0 Profit before tax 278 419 509 669 833 1,051 Price Performance Income tax expense 76 124 117 167 208 263 Minorities 5 9 5 6 7 9 9 Other post-tax income/(expense) 0 0 0 0 0 0 8 Net profit 198 286 387 496 618 779 6 DB adjustments (including dilution) 18 26 0 0 0 0 5 DB Net profit 216 311 387 496 618 779 3 Cash Flow (CNYm) 2 Jul 16 Oct 16 Jan 17Apr 17 Jul 17 Oct 17 Jan 18Apr 18 Cash flow from operations 504 391 545 633 709 840 Net Capex -57 -81 -117 -87 -106 -128 Greentown Service Free cash flow 447 309 428 546 602 713 HANG SENG INDEX (Rebased) Equity raised/(bought back) 0 1,266 0 0 0 0 Margin Trends Dividends paid -265 -22 -100 -149 -188 -235 Net inc/(dec) in borrowings 80 -180 0 0 0 0 12.0 Other investing/financing cash flows 166 -69 -620 0 0 0 11.0 Net cash flow 428 1,303 -292 398 414 478 Change in working capital 192 -1,431 -3,304 -3,278 -3,222 -3,075 10.0 Balance Sheet (CNYm) 9.0 Cash and other liquid assets 927 2,296 1,990 2,387 2,801 3,279 8.0 Tangible fixed assets 64 264 304 360 431 515 15 16 17 18E 19E 20E Goodwill/intangible assets 0 0 136 136 136 136 EBITDA Margin EBIT Margin Associates/investments 43 127 700 711 724 741 Other assets 608 635 1,009 1,175 1,393 1,634 Growth & Profitability Total assets 1,642 3,323 4,140 4,770 5,485 6,306 Interest bearing debt 180 0 0 0 0 0 50 140 Other liabilities 1,313 1,577 2,148 2,425 2,704 2,972 40 120 Total liabilities 1,493 1,577 2,148 2,425 2,704 2,972 100 30 80 Shareholders' equity 132 1,719 1,918 2,265 2,694 3,239 Minorities 17 27 74 79 87 96 20 60 40 Total shareholders' equity 149 1,746 1,992 2,345 2,781 3,335 10 20 Net debt -747 -2,296 -1,990 -2,387 -2,801 -3,279 0 0 15 16 17 18E 19E 20E Key Company Metrics Sales growth (%) 32.4 27.5 38.1 31.8 32.8 31.6 Sales growth (LHS) ROE (RHS) DB EPS growth (%) 45.1 21.7 6.1 27.9 24.6 26.1 Solvency EBITDA Margin (%) 9.7 11.2 9.4 9.4 8.8 8.5 EBIT Margin (%) 9.7 11.2 9.4 9.4 8.8 8.5 0 300 Payout ratio (%) 0.0 29.6 38.4 38.0 38.0 38.0 -100 250 ROE (%) 116.8 30.9 21.3 23.7 24.9 26.3 -200 200 Capex/sales (%) 2.0 2.2 2.3 1.3 1.2 1.1 -300 150 Capex/depreciation (x) nm nm nm nm nm nm -400 100 Net debt/equity (%) -501.5 -131.5 -99.9 -101.8 -100.7 -98.3 -500 50 Net interest cover (x) 40.1 250.0 nm nm nm nm -600 0 Source: Company data, Deutsche Bank estimates 15 16 17 18E 19E 20E Net debt/equity (LHS) Net interest cover (RHS) Jeffrey Gao, CFA +852 2203 6256 [email protected] Page 2 Deutsche Bank AG/Hong Kong 9 July 2018 Property Greentown Service Investment Thesis Outlook Figure 1: 28% CAGR of GFA under management in 2018-20F We initiate Greentown Service with a Hold rating and TP of HKD7.39.
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