China Property Management - Sector Deep Dive and Evaluation Framework
The China Property Management Sector is loved by investors for several reasons. The common thesis for investing in this space is :
- Visible and High growth for a few years: For most companies, profit growth is more than 30% CAGR over 3 years.
- Asset Light Business Models: ROE's over 20%.
- M&A catalysts: Most companies have just IPOed. They are cash-rich and can use their balance sheet to make favorable acquisitions.
- Strong Working Capital, Cash Flow, and Balance sheets.
The flip side is that a lot of these names have rallied (as you can see in the section Great Shareholder Returns) and have extremely high valuations. The average 1-year return for the names we look at in the sector has been 107%. We believe there is still upside in the universe of stocks to choose from in this space. In this insight, we will cover most of the HK listed names in the table below:
| Company | Ticker | Price | Mkt cap (US$m) | PER 2019 (x) | PER FY20 (x) | PER FY21 (x) | PER FY22 (x) | 3-Yr EPS CAGR (%) | PEG |
Country Garden | 6098 HK | 37.25 | 13,234 | 54.2 | 41.6 | 30.6 | 22.9 | 33.2 | 1.3 |
A-Living Servi-H | 3319 HK | 43.15 | 7,423 | 42.8 | 30.4 | 23.4 | 18.6 | 32.0 | 0.9 |
Poly Property -H | 6049 HK | 82.65 | 5,901 | 62.3 | 55.7 | 40.4 | 29.4 | 28.4 | 2.0 |
Greentown Service | 2869 HK | 9.80 | 4,068 | 52.6 | 41.0 | 31.4 | 24.6 | 28.8 | 1.4 |
China Overseas | 2669 HK | 8.26 | 3,503 | 50.5 | 39.1 | 30.6 | 24.5 | 27.2 | 1.4 |
Ever Sunshine Life | 1778 HK | 12.74 | 2,746 | 79.7 | 49.0 | 32.1 | 22.1 | 53.4 | 0.9 |
S-Enjoy Service | 1755 HK | 21.40 | 2,259 | 57.4 | 38.1 | 26.6 | 19.4 | 43.6 | 0.9 |
Central China | 9983 HK | 9.27 | 1,489 | 43.0 | 27.9 | 18.4 | 13.6 | 42.0 | 1.2 |
Powerlong Commercial | 9909 HK | 17.56 | 1,408 | 36.4 | 34.5 | 23.8 | 17.6 | 27.5 | 1.3 |
Times Neighborhood | 9928 HK | 10.42 | 1,222 | 73.1 | 38.3 | 22.4 | 15.0 | 69.5 | 0.6 |
Sichuan Languang | 2606 HK | 55.80 | 1,282 | 16.4 | 15.2 | 11.5 | 8.7 | 23.4 | 0.6 |
Aoyuan Healthy Life | 3662 HK | 8.56 | 802 | 31.7 | 23.9 | 17.2 | 13.4 | 33.2 | 0.7 |
Colour Life Services | 1778 HK | 3.92 | 720 | 9.8 | 8.8 | 8.0 | 7.7 | 8.4 | 1.0 |
Binjiang Service | 3316 HK | 12.98 | 463 | 26.9 | 20.4 | 15.6 | 12.6 | 28.8 | 0.7 |
| Adjusted Sector Avg* | 39.1 | 30.5 | 21.8 | 16.7 | 33.3 | 0.9 |
source: Bloomberg
What's Original?
Most reports you will see on the sell-side will involve single stocks or initiating coverages on 4-5 names followed by a thesis on buying or selling them. What we've done here is used a compendium of 14 of the best names listed on the HKex and contrast them in a framework that is easy to understand. We've weighted each of these nine criteria equally. Readers may elect to weight each criterion differently but the essence of using this framework is that the more criteria that are met the more investible the stock is.
Nine Criteria Framework
- Improving contracted GFA to GFA under management trend + supportive parent.
- Third-party Growth Potential.
- Listco balance sheet strength.
- Parent balance sheet strength.
- Margin improvement potential.
- Incentivized management.
- Reasonable valuations.
- No Red flags.
- Shareholder friendly actions like buybacks/dividends.
Putting these 9 points into a matrix for the stocks we get a table that ranks them. The companies in bold, are in our opinion the best names in the space.
| Company | Ticker | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | Total |
| Country Garden S | 6098 HK | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 7 | ||
| A-Living Servi-H | 3319 HK | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 7 | ||
| Poly Property -H | 6049 HK | 1 | 1 | 1 | 1 | 1 | 1 | 6 | |||
| Greentown Service | 2869 HK | 1 | 1 | 1 | 1 | 1 | 1 | 6 | |||
| China Overseas P | 2669 HK | 1 | 1 | 1 | 1 | 1 | 5 | ||||
| Ever Sunshine Li | 1995 HK | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 7 | ||
| S-Enjoy Service | 1755 HK | 1 | 1 | 1 | 1 | 1 | 1 | 6 | |||
| Central China Ne | 9983 HK | 1 | 1 | 1 | 1 | 1 | 1 | 6 | |||
| Powerlong Commer | 9909 HK | 1 | 1 | 1 | 1 | 1 | 1 | 6 | |||
| Times Neighborho | 9928 HK | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 7 | ||
| Sichuan Languang | 2606 HK | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 8 | |
| Aoyuan Healthy L | 3662 HK | 1 | 1 | 1 | 1 | 1 | 1 | 6 | |||
| Colour Life Serv | 1778 HK | 1 | 1 | 1 | 3 | ||||||
| Binjiang Service | 3316 HK | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 7 |
Based on the matrix if one adopts a mid-cap basket approach Languang Justbon Services (2606 HK), Times Neighborhood (9928 HK), and Ever Sunshine Lifestyle Services (1995 HK) are good names to own. A large-cap portfolio could consist of stocks like A-Living Services (3319 HK) and Country Garden Services Hold (6098 HK) with a greater weightage to the former.
For funds that make single stock purchases or having a small-cap inclination Binjiang Service Group (3316 HK) is an apt name to look at else, it also could be included in a basket of small and mid-caps.
In this insight, we will breakdown this nine criteria framework in detail.
Key Sections in this Insight
- Why Invest in China Property Management Companies (PMC's)?
- The PMC Business Model
- A Brief Summary of the Names
- Shareholder Returns in the Sector
- The nine criteria framework in detail
- More Opportunities and New Deals in the Space
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