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. Below (mn sqm) Residential Non-residential are our key arguments: y-y growth 350 31% 35% 30% 300 27% 28% 30%  We believe the brand name and high-quality services of the company 26% 26% 250 25% are the key strengths for winning new projects (especially high-end 20% residential projects) amid the ongoing consumption upgrade. 200 20% 150 15%  We believe the growth visibility of the company is high (26% earnings 100 10% CAGR implying 22-24% ROE in FY18-20F), assuming its GFA under 50 5% management to double, and VAS revenue to triple, by 2020F. - 0% 2013 2014 2015 2016 2017 2018F 2019F 2020F  However, margins may continue to narrow in the medium term, due to the fast expansion of low-margin / currently loss-making businesses. Source: Deutsche Bank

Valuation Figure 2: Revenue breakdown

(RMB bn) Community living services Our target price is based on a three-stage discounted cash flow of our free Consulting services 14 50% cash flow estimates. We apply 11.4% cost of equity (3.0% risk-free rate, 6.0% Property management services 12 y-y growth risk premium, 1.4x beta), 5-25% free cash flow growth in the middle stage (10 38% 40% 10 32% 32% 32% 33% 32% years) and 3% terminal growth rate. The benchmark index for the stock is 28% 8 30% MSCI China. Our target price of HKD7.39 implies 32x 12-month forward P/E 6 (27x net cash-adjusted P/E) and 7.7x FY18F P/B. 20% 4 10% 2

Figure 5: Summary of DCF-based valuation - 0% 2013 2014 2015 2016 2017 2018F 2019F 2020F 2018F 2019F 2020F 2021-2030F 2031F Free cash flow to shareholders (RMB mn) 520 572 678 18,189 2,808 Source: Deutsche Bank Terminal FCFE growth rate 5-25% 3% Terminal value (RMB mn) 33,426 Total FCFE 520 572 678 18,189 33,426 Figure 3: Margin may continue to be Discount factor 1.0 0.9 0.8 0.4 0.2 squeezed in medium term PV of discounted FCFE (RMB mn) 520 514 546 7,599 8,214 Discounted FCFE (RMB mn) 17,393 Gross margin EBIT margin Net margin No. of outstanding shares (mn) 2,778 25% DCF-based target price (RMB) 6.26 19.2% 18.2% 18.4% 20% 17.3% DCF-based target price (HKD) 7.39 16.5% 16.5% 16.1% 14.5% 15% Source: Company, Deutsche Bank 11.3% 9.0% 9.8% 9.6% 9.6% 9.0% 10% 8.6% 6.6% 8.4% 7.4% 7.5% Risks 5% 6.8% 7.3% 6.9% 6.6% 4.8% Macro risks: 1) inflation may speed up the increase in minimum wages and 0% 2013 2014 2015 2016 2017 2018F 2019F 2020F other material costs, which in turn squeezes the margins of the industry; 2) the government’s strict regulations on property management services may deter Source: Deutsche Bank the increase in property management fees; and 3) the potential cooling-down of property sales in China may slow down the overall growth of the industry. Figure 4: We expect 26% earnings Company-specific downside risks: 1) the failure to bid for new projects or CAGR in FY18-20F acquire other property management companies to expand its portfolio; and 2) (RMB mn) Net profits y-y growth 900 100% margin squeeze due to higher labour and material costs, and the expansion of 88% its low-margin / currently loss-making businesses. 800 90% 700 80% 70% 600 Upside risks are the slower-than-expected margin squeeze of value-added 60% 500 45% 44% 50% services, and faster growth of GFA under management. 400 28% 40% 300 24% 25% 26% 30% 200 20% 100 10% - 0% Deutsche Bank AG/Hong Kong 2013 2014 2015 2016 2017 2018F 2019F 2020F Page 3 Source: Deutsche Bank 9 July 2018

Property Greentown Service

Key charts of the industry

Figure 6: Total market size of GFA under management Figure 7: Market shares of listed property management exceeded 19.5bn sqm in 2017 companies are still very small (as at end-2017) (bn sqm) Nantional GFA under management 1.6% 1.5% 25 y-y growth 9% 1.4% 8% 20 7% 1.2% 6% 1.0% 15 5% 0.8% 0.7% 0.7% 0.6% 4% 10 0.6% 3% 0.4% 0.4% 5 2% 0.2% 1% 0 0% 0.0%

Color Life Greentown A- Living COPL CG Service

2010 2011 2012 2013 2014 2015 2016 2017 2009 Service

Source: CREIS, Deutsche Bank Source: Company, Deutsche Bank

Figure 8: Top 10 property management service providers Figure 9: GFA managed by Top 10 players growing faster own >11% of the market share in China than that of smaller players, and the gap is growing

(mn sqm) GFA under management by Top 10 players (mn sqm) Top 100 (x) 2,500 Market share of Top 10 players 11.1% 12% 250 Top 10 6.3 7.0 10.2% Top 10 / Top 100 5.8 10% 6.0 2,000 200 4.6 7.6% 5.0 8% 4.0 1,500 150 3.4 4.0 4.9% 4.6% 6% 3.0 1,000 100 2.1 2.9% 4% 2.0 500 50 2% 1.0

- 0% 0 - 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017

Source: CREIS, Deutsche Bank Source: Company, Deutsche Bank

Figure 10: Scorecard of major listed property management companies

Growth Landbank Service Profit Ticker Developer Scale prospect quality Execution quality margin Total 3319 HK A-Living 3 5 4 4 4 5 25 2669 HK COPL 4 3 4 3 4 2 20 1778 HK Colour Life 5 3 2 4 2 1 17 6098 HK CG Services 4 5 3 5 3 4 24 2869 HK Greentown Services 4 4 5 4 5 3 25

Source: Company data, Deutsche Bank

Page 4 Deutsche Bank AG/Hong Kong

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Property Greentown Service

Figure 11: Summary of valuation and ratings of property management companies

05 Jul Mkt Cap Latest Target Up/down- P/E P/E (cash-adjusted) P/B Dividend yield Company Ticker (USD mn) Price Price side Rating FY18F FY19F FY20F FY18F FY19F FY20F FY17 FY18F FY18F FY19F FY20F A-Living 3319 HK 2,288 13.30 19.18 44% Buy 23.8 16.2 12.0 17.0 10.9 7.4 10.2 2.9 1.1% 1.5% 2.1% Colour Life 1778 HK 1,270 7.46 n/a n/a N/A 15.0 12.3 9.8 17.8 13.8 10.3 3.7 2.8 2.7% 3.3% 4.1% COPL 2669 HK 1,026 2.42 n/a n/a N/A 19.7 16.2 13.8 11.7 8.5 6.1 9.3 6.8 1.6% 2.0% 2.4% Greentown Services 2869 HK 2,373 6.62 7.39 12% Hold 31.4 25.2 20.0 26.6 20.7 15.8 8.1 6.9 1.2% 1.5% 1.9% CG Services 6098 HK 3,223 9.99 n/a n/a N/A 35.0 25.3 18.6 29.2 19.4 12.7 14.9 10.8 0.7% 0.9% 1.3% Median 21.7 16.2 12.9 17.4 12.4 8.9 8.7 4.8 1.4% 1.8% 2.2%

Source: Bloomberg, Company, Deutsche Bank

Please refer to Appendix (page 26) for detailed analysis of the property management industry.

Deutsche Bank AG/Hong Kong Page 5

9 July 2018

Property Greentown Service

A high-end national player with strong growth in VAS

Greentown Service is a leading high-end residential property management service provider in China, ranking second by China Index Academy in 2018 among the Top 100 Property Management Companies in terms of overall competitiveness. Greentown Service is a sister company of Greentown China (3900 HK, Hold, HK$10.04), with the same founders. The company is now 36.7% owned by the original founders (Mr. Song Weiping, Mr. Shou Bainian and Miss Xia Yibo), and 21.3% owned by Miss Li Hairong (the co-founder).

Headquartered in Hangzhou of Zhejiang Province, the company has been providing property management services in China for over 20 years. As at end- 2017, Greentown Service has a portfolio of a total contracted GFA of 288mn sqm (including 138mn sqm GFA currently under management and 150mn sqm reserve GFA), covering 120 cities across China.

In addition to property management services, the company also provides a variety of value-added services to both property owners (i.e. residents of the projects for which the company provides property management services) and non-property owners (e.g. consultancy services to property developers and other property management companies).

Figure 12: Summary of different business segments of Greentown Service Type of services Descriptions Property management Range of property management services provided, such as security, cleaning, gardening, and repair and maintenance services services (collectively referred to as “standard” property management services), and management fees are charged to residents and owners of managed properties or developers. Property consulting Consulting services offered to developers and local property management companies to address various needs that arise during services each major stage throughout the course of the property development projects. (i) To developers: project planning, design management, construction management and marketing management consulting services during the design and development stages and display unit management services to facilitate sales of their developed projects. (ii) To developers and property management companies: management consulting services with respect to delivered properties Community value-added To provide property owners and residents of managed communities with access to an extensive array of daily necessities services complemented by a wide assortment of life-style products and services through a variety of channels (e.g. community products and services, home living services and community space services, property asset management services, cultural & education services). Source: Company, Deutsche Bank

Property management services: stable growth with improving margins

Property management services is the largest segment of the company, contributing ~70% of its total revenue and ~40% of its gross profits over the past few years. This business has experienced a 31% revenue CAGR since 2013, and we expect the growth to stabilize at ~27% in the coming years, with its contribution to account for >60% of revenue and >40% gross profits, considering the strong growth of the company’s value-added services and the improving gross margin of the property management services segment.

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Property Greentown Service

We forecast GFA under management to expand from 138mn sqm to 287mn sqm by 2020F (28% CAGR), considering the company’s: 1) high contract renewal rate (>96% over the past few years); 2) high bidding win rate (>70% in the past few years) for obtaining third-party projects given its quality services; 3) large reserve pipeline (150mn sqm at end-2017); and 4) rich cash position for potential M&A. Also, we expect its gross margin will continue to improve given: 1) higher property management fees; and 2) cost saving from economies of scale and the introduction of cost control measures (e.g. automation of basic functionalities).

138mn sqm GFA under management with high customer satisfaction The GFA under management of Greentown Service has posted a 26% CAGR over the past four years to 138mn sqm (~80% are residential properties, spreading in >1,000 projects across China) at end-2017. The company is a top 10 property management services provider in China in terms of GFA under management, although this only represents a 0.7% market share due to the highly fragmented property management market in China.

Thanks to its quality services, Greentown Service has received the highest customer satisfaction rate (93% vs. 85% on average for top-100 players) over the past few years, according to China Index Academy. As a result, the company has been successful in bidding for third-party projects (>70% bidding win rate) to lower its reliance on Greentown China (accounts for 57% of GFA under management in 2017, vs. >75% before). Given its long history and well- known brand name, Greentown Service has a strong presence in the Yangtze River Delta (accounted for 69% of its total GFA under management in 2017), followed by Bohai Rim (15%) and Pearl River Delta (5%).

In terms of revenue model, lump sum basis (the prevailing revenue model in China) accounts for 97.6% of its portfolio, while commission basis accounts for the remaining 2.4%.

Figure 12: 138mn sqm GFA under management, and we Figure 13: Greentown Service owns 0.7% market share expect the growth to remain stable at a 28% CAGR as the second most competitive player in China (mn sqm) (mn sqm) Residential Non-residential GFA under management y-y growth 160 0.8% 350 31% 35% Market share 0.7% 30% 140 0.7% 300 27% 28% 30% 26% 26% 0.6% 120 0.6% 250 25% 0.5% 20% 100 0.5% 0.4% 200 20% 80 0.4% 0.4% 150 15% 60 0.3% 100 10% 40 0.2%

50 5% 20 0.1% - 0.0% - 0% 2013 2014 2015 2016 2017

2013 2014 2015 2016 2017 2018F 2019F 2020F

Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

Deutsche Bank AG/Hong Kong Page 7

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Property Greentown Service

Figure 14: GFA under management from third-parties is Figure 15: Nationwide footprint with largest exposure in expanding much faster than that from Greentown China Yangtze River Delta (as of end-2017) From 3rd-party developers Others Hangzhou (mn sqm) 11% 17% From Greentown China PRD 150 100% 5% Greentown China as % of total 78% 75% Yuhang 73% 80% 67% 6% 100 57% Bohai Rim 60% 15% Ningbo 8% 40% 50 20%

- 0% YRD (others) 2013 2014 2015 2016 2017 38%

Note: 2016 and 2017 data are estimated by DB based on project completion of Greentown China. Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

Figure 16: Quality services secures >70% bidding win Figure 17: Greentown Service has received the highest rate to obtain third-party projects customer satisfaction rate in China in 2014-2017

94% 92.8% 90% 83.1% 85.4% 76.8% 80% 73.8% 92% 70.9% 70% 90% 60% 88% 50% 40% 86% 85.4% 30% 84% 20% 82% 10% 0% 80% 2013 2014 2015 2016 2017 Greentown Service Top-100 player average

Source: Company data, Deutsche Bank Source: Company data, CREIS, Deutsche Bank

Page 8 Deutsche Bank AG/Hong Kong

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Property Greentown Service

Figure 18: Most projects are contracted under lump sum Figure 19: High contract renewal rate to secure minimal basis (by GFA under management) withdrawal Commission basis 98.9% 95.6% 97.0% 96.6% 96.2% 2.4% 100% 90% 80% 70% 60% 50% 40% 30% 20% Lump sum basis 10% 97.6% 0% 2013 2014 2015 2016 2017

Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

Large reserve pipeline ready for conversion enhances growth visibility To sustain the high growth of its GFA under management, Greentown Service also bids for new projects that are still under construction from Greentown China and third-party developers, as reserve GFA to be managed. At end-2017, the company’s reserve GFA had reached 150mn sqm (+26% yoy). This represents a net increase of 61mn sqm, which significantly outpaces the 31mn sqm converted to GFA under management last year, and hence, sustained the reserve GFA coverage ratio (i.e. reserve GFA / GFA under management) at 1.1x in 2017 (vs. 1.1x in 2016), despite a higher base.

 From Greentown China: The GFA sold (including project management) by Greentown China has achieved a 28% CAGR in the past three years, and reached 8.3mn sqm in 2017. Given Greentown China’s high-end product positioning, and as a sister company of Greentown Service, Greentown Service has been given priority to be the property management service provider of Greentown China’s development properties.

 From third-party developers: Leveraging on its quality services and brand name, Greentown Service has been successful in obtaining third-party projects (>70% bidding win rate over the past few years). Considering the property sales (including project management) of Greentown China will likely reach another historical high this year (+20% yoy in 5M18), and Greentown Service continues its aggressive expansion via bidding third- party projects, we expect the reserve GFA of the company to grow at 20-25% p.a. in the next few years to reach 277mn sqm by 2020F.

Given the usual construction time of a high-end development project is about two to three years, we believe this large reserve GFA will gradually be converted into GFA under management in the following years, which in turn enhances the growth visibility of its property management segment in the medium term.

Deutsche Bank AG/Hong Kong Page 9

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Property Greentown Service

Figure 20: Reserve GFA should expand from 150mn sqm Figure 21: Newly-acquired reserve GFA outpaces the to >270mn sqm by 2020F to sustain strong growth growth of GFA under management converted from reserve GFA

(mn sqm) Reserve GFA y-y growth (mn sqm) Newly acquired reserve GFA 300 40% Newly added GFA under management 34% 120 32% 35% 250 28% 100 30% 26% 25% 200 23% 25% 80 20% 150 20% 60 15% 100 40 10% 50 5% 20

- 0% - 2013 2014 2015 2016 2017 2018F 2019F 2020F 2015 2016 2017 2018F 2019F 2020F

Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

Figure 22: Reserve GFA at 1.1x of GFA under Figure 23: Property sales of Greentown China likely to management in 2017 reach another historical high this year

1.1 (mn sqm) 1.2 1.1 Greentown GFA sold 1.1 1.0 9 8.3 70% 1.0 1.0 y-y growth 1.0 1.0 1.0 8 60% 7 6.3 50% 0.8 6 40% 5 0.6 3.9 3.9 30% 4 3.1 3.2 20% 0.4 3 2 10% 0.2 1 0% - - -10% 2013 2014 2015 2016 2017 2018F 2019F 2020F 2013 2014 2015 2016 2017 5M18

Source: Company data, Deutsche Bank Source: Company, Deutsche Bank

Rich cash position for potential M&A Greentown Service raised HKD1.3bn from its IPO in July 2016, and management planned to spend about half of the proceeds on M&A and value- added services expansion. Indeed, the company has spent RMB240mn on equity investments (including joint ventures) in 2016 and 2017, representing 34% of its net profits.

As of end-2017, the cash balance of the company has reached RMB2.0bn, which we believe should provide abundant resources to support any potential large scale M&A in the highly-fragmented market in the next few years.

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Property Greentown Service

Figure 24: Greentown Service has spent 34% of its net Figure 25: RMB2.0bn cash on hand (at end-2017) for profits on scale expansion over the past two years potential large scale M&A

(RMB mn) Acquisition of PP&E (RMB mn) 4,000 350 Investment in scale expansion 300 3,500 250 3,000 200 2,500 150 2,000 100 1,500 50 1,000 0 500 (50) 2013 2014 2015 2016 2017 0 (100) 2013 2014 2015 2016 2017 2018F 2019F 2020F

Source: Company data, Deutsche Bank Source: Company, Deutsche Bank

Figure 26: Summary of M&A of Greentown Service over the past two years

Consideration Date Mode Target company Business type % stake acquired (RMB mn) 1H16 Joint Venture Jinan High-tech Development Zone Group Property management n/a n/a 2H16 Acquisition Zhejiang Zheyuan Property management 40% 2.275 2H16 Acquisition Xiangtan Urban Asset Management Property management 51% n/a 2H16 Acquisition Chongqing Liangjiang Property Management Property management 51% n/a 2H16 Joint Venture Hubei Property Investment Property management 51% n/a 2H16 Acquisition Hongxiang Holdings Property management 60% n/a 2H16 Strategic Coooperation Zhongchu Real Estate Property management n/a n/a 2H16 Joint Venture Yinrun Property Management Property management 60% n/a 2H16 Acquisition Anhui Shengan Property management 49% n/a 2H16 Strategic Coooperation Agricultural Bank, Zhejiang branch Property management n/a n/a 2H16 Joint Venture Jiangxi Gantie Property management 60% n/a 2H16 Acquisition Zhejiang Siji Guangjia Home services 30% n/a 2H16 Joint Venture Wasu TV Media & entertainment 65% n/a 1H17 Acquisition Wenzhou Yayuan Property Service Property management 100% 0.501 1H17 Joint Venture Jinan Lixia Holding Property management 51% n/a 1H17 Joint Venture Hangzhou West Lake Construction Property management 51% n/a 1H17 Acquisition Jilin Tianshun Property Service Property management 70% 18 1H17 Acquisition Tianjin Yinte Property Service Property management 100% 59 1H17 Acquisition Zhejiang Lansong Supply Chain Management Supply chain management 27% 3 1H17 Acquisition Music Love & Live (Hangzhou Hupan Qinsheng) Art & culture 70% n/a 2H17 Acquisition Zhejiang Lvbang Property Services Property management 45% 16 2H17 Acquisition Idea Thrive Limited Investment holding 100% USD 84mn 2H17 Acquisition Hi-24 Convenience Stores (Beijing Haolinju) Convenience stores 35% 196 2H17 Acquisition Hangzhou Lianrui Advertising Advertising 55% n/a

Source: Company data, Deutsche Bank

27% revenue CAGR with slight margin expansion Driven by the strong growth of GFA under management, we expect the revenue of property management services to post a 27% CAGR in the next three years to account for 61-67% of the company’s total revenue (vs. 69% in 2017).

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Due to the labour-intensive nature of the property management services industry, 99% of the in-house staff of Greentown Service are directly related to property management services. Given almost 100% of the company's projects are contracted on a lump sum basis, Greentown Service has raised its outsourcing % of its non-core services (e.g. cleaning, maintenance, greening and gardening, etc.), to lower the labour costs for margin protection. In 2015, outsourcing expenses accounted for 33.6% of the company’s COGS, up from 13.1% in 2013 and 18.9% in 2014. As a result, the in-house labour cost of the company has been significantly lowered to account for only 36% of its total operating costs in 2017 (vs. 67% in 2013), while the GFA managed per in- house staff has increased to 6.7k sqm (vs. 5.5k sqm in 2015).

Besides, to reduce its reliance on manual labour and improve efficiency, the company has planned to be more proactive on replacing basic functionalities with automated systems. Together with the stable property management fees, we expect the gross margin of this segment to continue to improve in the following years to 11%-12% (vs. 11.2% in 2017), despite the increasing wages.

Figure 27: We expect the average property management Figure 28: Stable revenue growth from property fee to remain stable in the next few years management services, given strong scale expansion

(RMB/sqm/ Average property management fee (RMB mn) Residential Non-residential mth) y-y growth y-y growth 8,000 36% 40% 3.2 3.11 3.11 3.11 3.11 10% 33% 3.08 7,000 35% 3.1 3.06 29% 8% 6,000 27% 27% 30% 3.0 2.94 25% 26% 6% 5,000 25% 2.9 2.8 4% 4,000 20% 2.69 2.7 3,000 15% 2% 2.6 2,000 10% 0% 2.5 1,000 5% 2.4 -2% - 0% 2013 2014 2015 2016 2017 2018F 2019F 2020F 2013 2014 2015 2016 2017 2018F 2019F 2020F

Source: Company data, Deutsche Bank Source: Company, Deutsche Bank

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Figure 29: With a higher % of outsourcing non-core Figure 30: … in-house staff cost has been significantly services… reduced to account for only 36% of the operating costs and 32% of total revenue in 2017 Outsourcing expenses (RMB mn) As % of operating costs As % of revenue As % of COGS 80% 1,000 40% As % of operating expenses 67% 33.6% 70% 63% 63% 800 58% 30% 60% 48% 30.2% 50% 44% 600 18.9% 38% 36% 20% 40% 34% 32% 400 13.1% 30% 17.3% 10% 20% 200 11.9% 10% 0 0% 0% 2013 2014 2015 2013 2014 2015 2016 2017

Source: Company data, Deutsche Bank Source: Company, Deutsche Bank

Figure 31: The benefits of economies of scale, higher Figure 32: … therefore, we expect the gross margin of outsourcing %, and automations have increased the GFA the property management services segment to improve managed per in-house staff by 21% in two years… further

(Person) No. of in-house staffs (sqm) 14% GFA managed per staff (sqm) 11.4% 11.5% 25,000 8,000 12% 10.9% 11.2% 11.3% 10.2% 7,000 20,000 10% 8.6% 6,000 8% 15,000 5,000 5.6% 4,000 6% 10,000 3,000 4% 2,000 5,000 2% 1,000 0 - 0% 2015 2016 2017 2013 2014 2015 2016 2017 2018F 2019F 2020F

Source: Company data, Deutsche Bank Source: Company, Deutsche Bank

Value-added services: strong growth but margin may continue to be under pressure in the medium term

In addition to property management services, Greentown Service also provides a variety of value-added services to both property owners (i.e. community living services) and non-property owners (i.e. consulting services).

Community living services Greentown Service provides five major categories of community value-added services to property owners and residents of its managed properties, namely:

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1) community products and services; 2) home living services (e.g. housekeeping, greening, gardening, turnkey furnishing and other bespoke services); 3) community space services (e.g. advertisements, club house management, common area parking, etc.); 4) property asset management services (e.g. secondary property sales, house renting); and 5) cultural and education services (e.g. pre-school classes, education camps, interest classes).

The revenue of this segment has achieved a 66% CAGR over the past four years to reach RMB900mn in 2017, with 56% of the income from property asset management services, 21% from community products and services, 13% from community space services, 8% from home living services, and the remaining 2% from cultural and education services.

In terms of growth, property asset management services, community space services, and cultural and education services have shown the strongest growth (82-112% yoy), while home living services has only grown 10% yoy in 2017. We expect this trend to continue, and hence, drive the whole segment revenue to a 58% CAGR to RMB3.6bn in 2020F.

In terms of profitability, the gross margin of this segment has been significantly squeezed to 33.5% in 2017 (vs. >43% before), mainly driven by: 1) the service mix change (i.e. higher contribution from community products and services, which has a lower margin due to its business nature); and 2) the heavy early-stage investments for property asset management services, and cultural and education services (e.g. rental expenses, salary to sales staff and teachers).

We expect the gross margin of this segment to continue to be under pressure in the following few years, considering the fast expansion of: 1) the community products and services; 2) the property asset management services; and 3) the cultural and education services (requires three years to break even, and management plans to expand to 50 centres in 2018 and 100 centres in 2019, vs. 27 centres in 2017).

Figure 33: We expect 58% revenue CAGR for community Figure 34: … but gross margin may compress further living services… due to fast expansion of the services that are lower margin / currently loss-making (RMB mn) Cultural & education services 47.5% Property asset management services 50% 45.8% 46.7% 4,000 150% 43.5% Community space services 45% Home living services 40% 33.5% 3,000 Community products & services 35% 100% y-y 30% 26.0% 22.0% 2,000 25% 20.0% 20% 50% 15% 1,000 10% 5% - 0% 0% 2013 2014 2015 2016 2017 2018F 2019F 2020F

2013 2014 2015 2016 2017 2018F 2019F 2020F

Source: Company data, Deutsche Bank Source: Company, Deutsche Bank

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Consulting services Greentown Service also provides value-added services to non-property owners, including: 1) property under construction services to property developers for managing their pre-sale activities; and 2) management consulting services to other property management companies for their managed projects.

The revenue of this segment has achieved a 20% CAGR to reach RMB680mn in 2017, with property under construction services account for 84% of the income, and management consulting services account for the other 16%. Leveraging on its well-known brand name and good service quality, we expect this segment will continue its stable growth to reach RMB1.0bn in 2020F, implying a 14% CAGR.

Given the commission-based business nature, the gross margin of this segment is high at ~36% over the past few years, and we expect the high gross margin can be sustained in the following years.

Figure 35: Projects under construction services at stable Figure 36: Management consulting services at stable growth growth

# of projects at year-end (RMB) # of projects at year-end (RMB) 600 Average income per project 2,500 600 Average income per project 700

500 500 600 2,000 500 400 400 1,500 400 300 300 1,000 300 200 200 200 500 100 100 100

- - - - 2013 2014 2015 2016 2017 2018F 2019F 2020F 2013 2014 2015 2016 2017 2018F 2019F 2020F

Source: Company data, Deutsche Bank Source: Company, Deutsche Bank

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Figure 37: We expect 14% revenue CAGR for consulting Figure 38: Commission-based nature results in services sustainable high gross margin Management consulting services (RMB bn) 45% Property under construction services 33% 1.2 y-y growth 35% 40% 36.4% 35.9% 35.5% 36.1% 36.0% 35.5% 33.9% 35.0% 35% 30% 1.0 25% 30% 25% 0.8 25% 20% 0.6 14% 15% 15% 20% 12% 15% 10% 15% 0.4 10% 10% 0.2 5% 5% 0.0 0% 0% 2013 2014 2015 2016 2017 2018F 2019F 2020F 2013 2014 2015 2016 2017 2018F 2019F 2020F

Source: Company data, Deutsche Bank Source: Company, Deutsche Bank

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Financial analysis

Profitability

Boosted by the strong growth of its GFA under management and its value- added services, the revenue of Greentown Service has achieved 32% CAGR since 2013. With the strong growth momentum to continue, we expect the revenue to post a 32% CAGR to reach RMB6.8bn/ RMB9.0bn/ RMB11.8bn in FY18-20F.

In terms of revenue breakdown, property management services should continue to be the major revenue contributor that accounts for 67% of the revenue and 44% of the gross profits in FY18F, considering its lower margin than value-added services.

With the slight margin expansion of property management services being off- set by the significant margin squeeze of community living services, we expect the overall gross margin to continue to be squeezed to 16-17% (vs. 18.4% in FY17), while net profit margin remains stable at ~7% (vs. 7.5% in FY17) due to the benefits from economies of scale. Hence, we forecast net profits to post a 26% CAGR to RMB496mn/ RMB618mn/ RMB779mn in the next three years, implying 22-24% ROE (vs. 20.2% in FY17) and 10-12% ROA (vs. 9.4% in FY17), given its asset-light business nature.

Figure 39: Revenue breakdown by type of services Figure 40: Property management services segment remains the largest revenue contributor in 2018F

(RMB bn) Community living services Community living Consulting services services 14 50% Property management services 22% 12 y-y growth 38% 40% 10 32% 32% 32% 33% 32% 28% 8 30%

6 20% Consulting services 4 11% Property 10% management 2 services 67% - 0% 2013 2014 2015 2016 2017 2018F 2019F 2020F

Source: Company data, Deutsche Bank Source: Company, Deutsche Bank

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Figure 41: Value-added services are more profitable than Figure 42: Overall margin may compress further due to property management services significant margin squeeze of VAS Property management services Gross margin EBIT margin Net margin Consulting services 25% Community living services 100% 7% 6% 9% 13% 19.2% 90% 22% 18% 18% 22% 18.2% 18.4% 25% 29% 26% 30% 20% 17.3% 80% 20% 20% 19% 32% 33% 35% 38% 16.5% 16.5% 17% 13% 16.1% 70% 11% 14.5% 10% 9% 60% 43% 15% 35% 31% 26% 24% 21% 50% 50% 19% 11.3% 9.8% 9.6% 9.6% 40% 9.0% 9.0% 8.6% 73% 74% 72% 70% 69% 10% 30% 67% 64% 61% 6.6% 20% 38% 40% 40% 42% 44% 44% 44% 28% 8.4% 10% 7.4% 7.5% 5% 6.8% 7.3% 6.9% 6.6% 0% 4.8% Rev GP Rev GP Rev GP Rev GP Rev GP Rev GP Rev GP Rev GP 0% 2013 2014 2015 2016 2017 2018F 2019F 2020F 2013 2014 2015 2016 2017 2018F 2019F 2020F

Source: Company data, Deutsche Bank Source: Company, Deutsche Bank

Figure 43: We forecast 26% net profits CAGR due to Figure 44: Asset-light business model enhances ROA and strong revenue growth and stable margins ROE

(RMB mn) Net profits y-y growth ROE ROA 30% 900 100% 88% 24.1% 90% 22.9% 800 25% 21.9% 700 80% 20.2% 18.1% 70% 20% 600 60% 500 45% 15% 44% 50% 400 28% 40% 10% 300 24% 25% 26% 12.4% 30% 10.4% 11.3% 9.4% 9.4% 200 20% 5% 100 10% - 0% 0% 2013 2014 2015 2016 2017 2018F 2019F 2020F 2016 2017 2018F 2019F 2020F

Source: Company data, Deutsche Bank Source: Company, Deutsche Bank

Liquidity

Greentown Service had repaid all its borrowings with its IPO proceeds in 2016. Thanks to its high management fee collection rate (96-99% over the past few years), the company has recorded strong operating cash inflow that can fully cover its dividend and capex. The cash on hand of the company has reached RMB2.0bn at end-2017 (equivalent to 48% of its total assets), and we expect it to increase 65% from the current level to RMB3.3bn by 2020F.

Also, Greentown Service has managed to significantly shorten its cash conversion cycle to 11 days in 2015 (vs. 31 days in 2013) under enhanced collection efforts. As of end-2017, only 1% of its trade receivables were overdue for >2 years. This implies a low default risk of its trade receivables (the

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provision for loss allowance recognized in P&L only accounted for 0.7-1.0% of its total revenue over the past five years).

Figure 45: Only 1% of trade receivables were overdue for Figure 46: Cash conversion cycle has been significantly >2 years at end-2017 improved to only 11 days in 2015 Average AR turnover day 1-2 years >2 years (Days) 8% 1% 40 Average AP turnover day Cash conversion cycle 35 30.6 29.7 30 25 20

15 11.1 10 5 Within 1 year 91% 0 2013 2014 2015

Source: Company data, Deutsche Bank Source: Company, Deutsche Bank

Figure 47: Management fee collection rate stays high at Figure 48: Rich cash on hand accounts for ~50% of total >95% over the years assets

96.9% 97.4% 98.6% (RMB mn) Cash balance As % of total assets 100% 95.6% 95.9% 3,500 80% 90% 69% 80% 3,000 70% 56% 70% 51% 52% 60% 2,500 48% 50% 60% 50% 50% 2,000 38% 34% 40% 40% 1,500 30% 30% 1,000 20% 20% 500 10% 10% 0% 0 0% 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 2018F 2019F 2020F

Source: Company data, Deutsche Bank Source: Company, Deutsche Bank

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Financial statements

Figure 49: Income statements (RMB mn)

Income Statement 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E Gross margin 14.5% 16.5% 18.2% 19.2% 18.4% 17.3% 16.5% 16.1% EBIT margin 6.6% 9.0% 9.8% 11.3% 9.6% 9.6% 9.0% 8.6% Core net margin 4.8% 6.8% 7.4% 8.4% 7.5% 7.3% 6.9% 6.6%

Revenue 1,672 2,205 2,919 3,722 5,140 6,774 8,998 11,838 Cost of sales (1,429) (1,841) (2,388) (3,006) (4,194) (5,600) (7,509) (9,933) Gross profit 242 363 531 716 946 1,174 1,489 1,905

SG&A (126) (151) (238) (285) (438) (535) (693) (900) Share of results of associates and JCE 1 (1) 2 3 8 10 13 18 Other operating income/expenses (5) (12) (9) (15) (23) - - - Operating profit (EBIT) 111 199 285 420 492 649 809 1,023

Interest expenses (3) (3) (9) (7) - - - - Interest income 1 2 2 5 19 20 24 28 Other non-operating income/expenses (1) 1 (0) 0 (2) - - - Pre-tax exceptional items - - - - - Profit before tax 108 199 278 419 509 669 833 1,051

Income tax (26) (49) (76) (124) (117) (167) (208) (263) Post-tax exceptional items (6) (0) - - - Profit before minority interests 76 149 203 295 392 502 625 788

Minority interests (3) 0 5 9 5 6 7 9 Reported net profit 79 149 198 286 387 496 618 779

Source: Company, Deutsche Bank

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Figure 50: Balance sheet (RMB mn)

Balance Sheet 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E

Investment properties 26 24 ------Interests in associates and JCEs 106 6 15 127 559 569 582 599 Investments (L/T) 5 0 - - 113 113 113 113 Property, plant and equipment 35 34 64 264 304 360 431 515 Intangible assets - - - - 136 136 136 136 Trade, loan and other receivables (L/T) - 123 131 28 19 19 19 19 Deferred tax assets 36 47 56 51 73 87 105 121 Other assets ------Non-current assets 208 234 265 470 1,203 1,284 1,386 1,503

Inventories 11 2 2 10 128 230 368 515 Trade and other receivables (S/T) 312 438 420 547 790 839 901 980 Investments (S/T) 100 134 28 - 29 29 29 29 Pledged bank deposits + Restricted cash + Time deposits 29 58 91 115 153 153 153 153 Cash and cash equivalents 299 437 836 2,182 1,836 2,234 2,648 3,126 Current assets 751 1,068 1,377 2,853 2,936 3,485 4,100 4,803 Total assets 960 1,302 1,642 3,323 4,140 4,770 5,485 6,306

Receipts-in-advance 231 250 338 473 650 780 897 986 Accruals, trade and other payables 395 626 847 943 1,304 1,434 1,577 1,735 Taxes payable 42 72 88 118 167 184 203 223 Other payables 22 23 18 20 17 17 17 17 Bank and other borrowings (S/T) 40 100 180 - - - - - Current liabilities 731 1,071 1,472 1,555 2,138 2,415 2,694 2,962

Bank and other borrowings (L/T) ------Deferred tax liabilities - - 3 11 4 4 4 4 Other liabilities 19 14 18 12 6 6 6 6 Non-current liabilities 19 14 21 22 10 10 10 10 Total liabilities 750 1,085 1,493 1,577 2,148 2,425 2,704 2,972

Issued capital 50 50 0 0 0 0 0 0 Share premium and reserves 23 27 34 1,356 1,185 1,185 1,185 1,185 Retained earnings 106 130 98 363 733 1,080 1,509 2,053 Attributable equities 178 207 132 1,719 1,918 2,265 2,694 3,239

Minority interests 32 11 17 27 74 79 87 96 Total equities 210 217 149 1,746 1,992 2,345 2,781 3,335 Total liabilities and equities 960 1,302 1,642 3,323 4,140 4,770 5,485 6,306 Source: Company, Deutsche Bank

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Valuation and risks

Valuation methodology

Our target price is based on a three-stage discounted cash flow of our free cash flow estimates. We believe a FCFE approach better reflects the value of property management companies, considering their strong operating cash inflows will be used for M&A, which could add substantial upside to our current earnings forecasts and potential dividends albeit payout ratios tend to be low during the growth phase. We apply 11.4% cost of equity (3.0% risk-free rate, 6.0% risk premium, 1.4x beta- consistent with other property developers), 5-25% free cash flow growth in the middle stage (10 years) and 3% terminal growth rate, reflecting a longer-term stable growth phase in line with China inflation. The benchmark index for the stock is MSCI China. Our target price of HKD7.39 implies 32x 12-month forward P/E (27x net cash-adjusted P/E) and 7.7x FY18F P/B.

Figure 51: Summary of DCF-based valuation

2018F 2019F 2020F 2021-2030F 2031F Free cash flow to shareholders (RMB mn) 520 572 678 18,189 2,808 Terminal FCFE growth rate 5-25% 3% Terminal value (RMB mn) 33,426 Total FCFE 520 572 678 18,189 33,426 Discount factor 1.0 0.9 0.8 0.4 0.2 PV of discounted FCFE (RMB mn) 520 514 546 7,599 8,214 Discounted FCFE (RMB mn) 17,393 No. of outstanding shares (mn) 2,778 DCF-based target price (RMB) 6.26 DCF-based target price (HKD) 7.39

Source: Company, Deutsche Bank

Investment risks

Macro risks: Major macro risks include: 1) inflation may speed up the increase in minimum wages and other material costs, which in turn squeezes the margins of the industry; 2) the government’s strict regulations on property management services may deter the increase in property management fees; and 3) the potential cool-down of property sales in China may slow down the growth of the overall GFA under management of the property management industry.

Company-specific risks: The major company downside risks include: 1) the failure to bid for new projects or acquire other property management companies to expand its GFA under management; 2) a squeeze in margins due to increase in labour and material costs that can’t be transferred to property owners; and 3) longer-than-expected time for converting its reserve GFA to GFA under management due to delay in project deliveries. Upside risks are slower-than-expected margin squeeze of value-added services, and faster growth of GFA under management.

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Figure 52: Summary of valuation and ratings of property management companies

Source: Bloomberg, Company, Deutsche Bank

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Management profile, corporate structure and development milestones

Management profile

Ms. Li Hairong (aged 60), is the Chairman and Executive Director of Greentown Service. She joined Greentown China in June 1997 and then joined Greentown Service in October 1998. She is responsible for the development strategy and strategic planning, as well as for making decisions for material operational matters.

Mr. Yang Zhangfa (aged 46), is the Vice Chairman of Greentown Service. He is responsible for making decisions for material operational matters, participating in Board decisions and implementing the resolutions of the Board. Mr. Yang joined the company in February 2002.

Mr. Wu Zhihua (aged 39) is an Executive Director and CEO of Greentown Service. He is responsible for the overall business operation and daily management of the Group, making decisions for material operational matters, participating in Board decisions and implementing the resolutions of the Board. Mr. Wu joined the company in June 2003.

Mr. Chen Hao (aged 48) is an Executive Director. He joined the company in May 2015 as a Vice General Manager. He is primarily responsible for the management of community products and services.

Mr. Ho, Kenneth Kai Chung (aged 52) is the CFO and one of the joint company secretaries of Greentown Service. He is responsible for finance and accounting works, as well as company secretarial matters. Before joining the company, Mr. Ho had worked in various financial institutions from 1996 to 2015.

Figure 53: Key Greentown Service management staff

Position in Position in Greentown China Category Name Greentown Service Now Before Executive director Li Hairong Chairman and ED n/a n/a Yang Zhangfa Vice Chairman n/a n/a Wu Zhihua ED and CEO n/a n/a Chen Hao ED n/a n/a Senior Management Jin Keli COO n/a n/a Yuan Weidong Chief Technology Officer n/a n/a Ho, Kenneth Kai Chung CFO and joint company secretary n/a n/a Non-executive director Shou Bainian Non-ED n/a ED Xia Yibo Non-ED Chairlady Chairlady

Source: Company, Deutsche Bank

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Corporate and shareholding structure

Greentown Service is a sister company of Greentown China (3900 HK, Hold) that with the same founders. The company is now 36.7% owned by the original founders (Mr. Song Weiping, Mr. Shou Bainian and Miss Xia Yibo), and 21.3% owned by Miss Li Hairong (the co-founder).

Figure 54: Corporate structure of Greentown Service

SONG Weiping, LI Hairong XIA Yibo Greentown China Greenwoods Others (21.28%) SHOU Bainian (3900.HK) (5%) (5.32%) (19.4%) (36.72%)

Founding Senior management shareholders Public shareholders

58.0% 10.8% 31.2%

Greentown Service (2869.HK)

Source: Company, Deutsche Bank

Development milestones

Figure 56: Company milestones Year Milestones 1998 Establishment of the company; started providing property management services. 2000 Started providing property consulting services. 2003 Started expanding business operations across the PRC, particularly major first tier cities in the Yangtze River Delta and Bohai Economic Rim 2004 Was recognized as a property management company of first class quality 2007 Started providing community value-added services. 2014 "Launched the “smart community” project, including the “Happy Greentown” mobile application, the “smart property management” platform and the “smart hardware management” platform. 2016 Listed on Hong Kong Stock Exchange 2017 Became a member of the “Shenzhen-Hong Kong Stock Connect” trading program Strategic adjustment and further investment were made in cultural & education services Source: Company, Deutsche Bank

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Appendix

A highly-fragmented market with a size of 19.5bn sqm GFA under management

According to CREIS, the property management services market in China has been registering a 6.6% CAGR since 2009, and has exceeded 19.5bn sqm in 2017. However, similar to the property sales market, the property management services market in China is highly fragmented with hundreds of property management companies, such that the market share of each service provider is only a tiny part of the overall market.

For example, the market share (by GFA under management) of a few of the largest players only ranged from 0.4-1.5% in 2017, including 1.5% for Color Life, 0.7% for Greentown Service, 0.7% for Chinese Overseas Properties (COPL), 0.6% for CG Services, and 0.4% for A-Living.

Figure 55: Total market size of GFA under management Figure 56: Market shares (by GFA under management) of exceeded 19.5bn sqm in 2017 listed property management companies are still very small (as at end-2017) (bn sqm) Nantional GFA under management 1.6% 1.5% 25 y-y growth 9% 1.4% 8% 20 7% 1.2% 6% 1.0% 15 5% 0.8% 0.7% 0.7% 0.6% 4% 10 0.6% 3% 0.4% 0.4% 5 2% 0.2% 1% 0 0% 0.0%

Color Life Greentown A- Living COPL CG Service

2010 2011 2012 2013 2014 2015 2016 2017 2009 Service

Source: CREIS, Deutsche Bank Source: Company, Deutsche Bank

Accelerating market consolidation is the key trend

The property management industry is still at the early stage of consolidation, with the top 10 players only owning 11.1% market share in 2017, according to CREIS. Although the absolute market share is still small, market consolidation has indeed been accelerated, from 2.9% in 2012 to 4.6% in 2014, 10.2% in 2016 and 11.1% in 2017.

The average GFA under management of the top 10 players has reached 216mn sqm in 2017, implying a 39% CAGR over the past five years (vs. 18% of the top

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100 players). Hence, the GFA under management ratio of the top 10 / top 100 players has expanded to 5.8x in 2017 from 2.1x in 2012.

We expect market consolidation in the property management services industry to progress even further in the coming years, considering the following factors:

 Boosted market consolidation in property sales market: Based on CRIC data, the top 20 developers owned 32.5% market share of property sales in 2017, up from 25.2% in 2016. We expect this ratio to reach ~50% by 2020F, considering the diversified financing channels, better brand names/products, and stronger execution of the large developers. As primary property sales is one of the major channels that property management companies expand their reserve GFA to be managed (property management companies are usually the subsidiaries of the developers), the accelerated consolidation in the primary property sales market translates into a faster consolidation in the property management industry.

 Easier capital access of the large players for M&A: Dozens of property management companies have been listed in A and H share markets (via IPO, introduction listing, etc.) over the past few years. In addition to their operating cash inflows, listings gives them another financing channel for capital raising to any potential M&A. In fact, >20 major M&A have happened since 2015, and we expect this will continue, to become another major expansion strategy.

 Better brand name and service quality: Large property management companies can leverage on the national brand name of their parent companies (i.e. developers) when bidding for projects developed by third-parties. Also, large property management companies are usually more willing to invest on service standardization, which enhances their service quality to better than small local companies. For example, the bidding win rate of A-Living has remained high at >90%, while that of Greentown Services is also high at >70%.

Figure 57: List of Top 10 property management services providers (by overall competitiveness) Property management company Parent / related property developer Ranking English Chinese Name 2017 sales ranking by GFA 1 Vanke Property Service 万科物业发展股份有限公司 China Vanke 3 2 Greentown Services 绿城物业服务集团有限公司 Greentown China 15 3 Country Garden Services 广东碧桂园物业服务股份有限公司 Country Garden 1 4 Changcheng Property 长城物业集团股份有限公司 n/a n/a 5 Poly Property Development 保利物业发展股份有限公司 Poly Real Estate 5 6 Colourlife 彩生活服务集团有限公司 Fantasia 84 7 Evergrande Property Services (Jinbi) 恒大物业（金碧有限公司） Evergrande 2 8 Gemdale Property Management 金地物业管理集团公司 Gemdale 16 9 Longfor Property Management 龙湖物业服务集团有限公司 Longfor 8 10 Jinke Property Management 金科物业服务集团有限公司 Jinke 12

Source: CREIS, Deutsche Bank

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Figure 58: Top 10 property management services Figure 59: GFA managed by Top 10 players is growing providers own >11% of the market share in China much faster than smaller players, and the gap is enlarging

- 0% 0 - 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017

Source: CREIS, Deutsche Bank Source: Company, Deutsche Bank

Figure 60: Market share of Top 20 developers expected Figure 61: The high bidding win rate of A-Living and to reach ~50% by 2020F Greentown Service shows their strong competitiveness (RMB bn) Top 20 developers' sales (LHS) 47.0% Greentown Service A- Living 5,000 Market share (RHS) 50% 100% 4,500 45% 90% 4,000 40% 32.5% 3,500 35% 80% 70% 3,000 25.2% 30% 22.8%23.1% 2,500 25% 60% 18.9% 18.0% 50% 2,000 14.2%14.8% 20% 1,500 11.9% 15% 40% 1,000 10% 30% 500 5% 20% - 0% 10%

2009 2010 2011 2012 2013 2014 2015 2016 2017 1Q18 2013 2014 2015 2016 2017

Source: CREIS, Deutsche Bank Source: Company, Deutsche Bank

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Figure 62: Summary of major M&A in property management industry Company Targets being acquired Stakes acquired Vanke Property Services Zhejiang Yaojiang Property Management 25-100% Zhongxin Suzhou Heqiao Property Services Yunnan Takyun Property Management Beijing Baijia Property Management Shenzhen Zhuohong Property Management Dongguan Zhuosheng Property Management Greentown Services Wenzhou Yayuan Property Services 20-100% Jilin Tianshun Property Services Zhejiang Lansong Supply Chain Management Zhejiang Lvhua International Travel Agency Shanghai Xinhu Property Management Colour Life Wuhan Tianyuhong Property Management 50-100% Shenzhen Qianhai WeLife Network Services Shanghai Tonglai Property Management Century Property Management Kaiyuan International Property Management Wanxiangmei Property Management Steadlink Asset Nanjing Mingcheng Property Management Nanjing Huitao Property Management Nanjing Jinjiang Property Management Shanghai Tongyi Property Management Tianjin Xintang Property Management Guangzhou Huayan Property Management Tieling Zhengnan Property Management China Overseas Property CITIC Property Management 100% COGO Property Management A-Living Greenland Property Services 50-100% Nanjing Zizhu Property Management Justbon Hangzhou Lvyu Property 76-80% Shanghai Zhenxian Property Management Ocean Home Plus Hangzhou Xinshidai Property Management 30-60% Nantong Qiantong Property Management Beijing BestCleaning Nacity Shanghai Cailin Property Management 90% Trans Service Yicheng Property Management 100% First Property Xi'an Lingshengboxing Property Management 100% Changcheng Property Beijing Angang Property Management 100% Shandong H&C Property Management Hong Kong Sky Pacific Property n/a Nanjing Baishi Jumbo Property Management Qingdao Hisense Property Management n/a Shanghai Yinghai Sanxing

Source: CREIS, Deutsche Bank

Summary of major listed property management companies

Among the five major listed property management companies (namely CG Services, Greentown Service, A-Living, CPOL and Colour Life), we believe Greentown Service is the strongest in terms of overall competitiveness (mainly due to its quality landbank under management and good services), while Colour Life is the weakest (mainly due to its mid-to-low-end positioning and low profit margin).

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Figure 63: Scorecard of major listed property management companies

Source: Company data, Deutsche Bank

Figure 64: Summary of key operational data of major listed property management companies

Landbank (as of end-2017) 2017 Operational matrix GFA (mn sqm) Avg mgmt fee Mgmt fee Contract GFA / staff * Profits / GFA Ppt mgmt companies Ticker Under mgmt Reserve # of cities # of projects (RMB/sqm/mth) collection renewal (sqm) (RMB/sqm) A-Living 3319 HK 78 48 69 >200 3.01 (residential) 96.0% 98.0% 6,422 3.70 Colour Life 1778 HK 294 142 222 1,926 1.20-1.50 ~95% n/a 40,704 1.09 COPL 2669 HK 128 n/a 73 646 ~3.00 ~90% n/a 4,275 2.39 Greentown Services 2869 HK 138 150 120 1,035 3.11 98.6% 96.2% 6,677 2.81 CG Services 6098 HK 123 207 240 440 2.05 94.5% 99.3% 5,123 3.27

Note: *Only include in-house staff Source: Company data, Deutsche Bank

Figure 65: Summary of key financial data of major listed property management companies FY17 gross profits Net cash balance breakdown Net profits (RMB mn) ROE (RMB mn) Ppt mgmt companies Ticker Ppt mgmt VAS FY17 FY18F FY19F FY20F CAGR FY17 FY18-20F FY17 FY18F A-Living 3319 HK 55% 45% 290 632 927 1,252 63% 20% 12-18% 880 4,289 Colour Life 1778 HK 59% 41% 321 551 684 859 39% 19% 22-23% (271) (1,037) COPL 2669 HK 72% 28% 307 400 488 575 23% 37% 32-38% 2,446 3,030 Greentown Services 2869 HK 42% 58% 387 496 618 779 26% 20% 22-24% 1,990 2,387 CG Services 6098 HK 72% 28% 402 605 837 1,136 41% 28% 34-35% 2,637 3,510

Note: COPL reports its financials in HKD, while the rest report in RMB. Source: Company data, Deutsche Bank

Figure 66: Summary of valuation and ratings of property management companies

Source: Bloomberg Finance LP, Company, Deutsche Bank

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Appendix 1

Important Disclosures

*Other information available upon request

Disclosure checklist Company Ticker Recent price* Disclosure Greentown Service 2869.HK 6.62 (HKD) 5 Jul 18 NA Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at https://research.db.com/Research/Disclosures/CompanySearch. Aside from within this report, important conflict disclosures can also be found at https://research.db.com/Research/Topics/Equities?topicId=RB0002 under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at https://research.db.com/Research/Disclosures/Company?ric=2869.HK

Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Jeffrey Gao/Jason Ching/Stephen Cheung/Foo Leung

Historical recommendations and target price: Greentown Service (2869.HK) (as of 7/5/2018)

9.00 Previous Recommendations

8.00 Strong Buy Buy 7.00 Market Perform Underperform Not Rated 6.00 Suspended Rating

5.00 Current Recommendations

4.00 Buy

Hold Security PriceSecurity 3.00 Sell Not Rated Suspended Rating 2.00 *New Recommendation Structure 1.00 as of September 9,2002 **Analyst is no longer at Deutsche 0.00 Bank

Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Date

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Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 500 57 % share-holder return (TSR = percentage change in 450 share price from current price to projected target price 400 350 plus pro-jected dividend yield ) , we recommend that 300 35 % investors buy the stock. 250 200 Sell: Based on a current 12-month view of total share- 150 19 % 8 % 100 13 % holder return, we recommend that investors sell the 50 13 % stock 0 Buy Hold Sell Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not Companies Covered Cos. w/ Banking Relationship recommend either a Buy or Sell. Asia-Pacific Universe Newly issued research recommendations and target

prices supersede previously published research.

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