Two Good Buys in Property Management

新創建(SEHK:659)全年盈利大跌94%,主要受非經營手撥備影響,但股息率有9%,值得留意嗎?

The financial world is in a strange place right now.

As governments around the globe try to ease lockdown measures, stock markets have fluctuated because of uncertainty. However, some Chinese property management giants listed in HKEX have seen their stocks skyrocket to new heights.

How has the industry been able to remain strong despite a market slump? And what companies should investors be looking at?

There are two factors to consider when it comes to property management companies:

Do they have a transparent structure?

Despite decreasing demand for real estate in the 1st-tier cities and policy to stabilise the property market, the property market continues to thrive that thanks to a series of new adjustment policies. These policies were introduced in February to combat the deteriorating economy.

The larger the parent company is and the more land of the parent company holds, the greater the growth potential and visibility of the property management company has, as it probably can obtain more projects from parent company, which makes it more likely to outrun its competitors.

Do they have a healthy growing Gross Floor Area (GFA)?

With rent being a market-wide, more constant influential factor as it is affected more by the macro environment, its growth or drop rate might not see a huge gap between corps. Therefore, what plays a key role in the business would be their GFA, mainly the GFA under management and the contracted GFA. Combining the two, you can get a picture of its development strength in the present and the near future.

It is also noteworthy that with the middle-class occupies a growing share in China’s population, tenants now seek value-added services coupling their expectation in living quality. Elevating consumption and education level, and the rising number of dual-career families contribute to the trend. Some enterprises have already made the move to capitalise the underlying opportunities, like A-Living Services (SEHK: 3319) providing “Community 360° value-added services”. We also see value-added services dominates the revenue of Kaisa Prosperity (SEHK: 2168) and S Enjoy Service Group Co Ltd (SEHK: 1755), thus it is believed that it can be a key driver of the industry growth and another key factor to consider when evaluating the stocks.

Among the listed property management stocks, the following two are noteworthy:

A-Living Services (SEHK: 3319)

The stock price of A-Living Services was soaring last year. Its valuation remains given its significant performance.

Until Dec 31st, 2019, the group’s sale revenue was RMB 5.127 billion, which represents a 51.8% rise when compared to the corresponding period in the last year. Gross profit and net profit recorded RMB 1.883 billion and RMB 1.292 billion dollars, seeing an increase of 59.3% compared to the same period in the previous year.

Furthermore, there was also a significant growth in its GFA under management and contracted GFA. By Dec 31, 2019, the total GFA has surged by 69.4% and 55.0% compared with the last financial year, achieved 234 million square metres and 356 million square metres.

Agile Property (SEHK: 3383) and Greentown China Holdings (SEHK: 3900), the two major shareholders, contributed one-third of the GFA. It is believed that the acquisition of 60% equity interest of CMIG PM and New CMIG PM would consolidate and complement the existing business ground, accelerating business expansion with expected growth in GFA under management to 500 million square metres.

Poly Property Development (SEHK: 6049)

With a national enterprise background, Poly Property Development has proven its resilience against the market downturn. It soon recovered from the drastic drop in March, striking a new peak of HK$92.85. The highlight of the stock is public properties (e.g. schools, governmental offices, transport facilities, public amenities) occupying over one half of the total GFA under management, which is less sensitive to the property market volatility and has a high renewal rate.

Until December 31, 2019, it achieved a sales revenue of 5.96 billion dollars (RMB), a 41.1% increase from the same period last year, also a 42.2% growth in gross profit to 1.211 billion dollars and a 49.3% growth of net profit to 491 million dollars. Its GFA under management reached 287 million square metres with a 49.3% growth while the contracted GFA also saw 50.6% increment, reached 498 million square metres.

The stocks above both have a relatively high managing volume and above-average growth rate, making them favourable and stable choices in the capital markets.

Conclusion

According to a report from the China Property Management Association from 2019, the scale and profitability of the property management market are gradually strengthening. High P/E ratio also reflects the industry’s popularity. Most importantly, high defensiveness and transparency of the industry can survive better in the current ups and downs, suitable for mid-to-long term investment.

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