China Property Management Firms Earnings: Valuation Cut on More Downbeat Growth Projection

We cut our fair value estimate on Country Garden Services, or CGS, to HKD 17.50 from HKD 42.50 and on Greentown Service Group 02869, or GSG, to HKD 5.20 from HKD 6.50. This is mainly due to our more conservative top-line growth forecast for both firms, particularly for property management and value-added services, or VAS, to nonproperty owners. While CGS and GSG both saw expansion in gross floor area under management, or GUM, for the first half of 2023, we expect competition over high-quality third-party projects to intensify, weighing down their long-run growth trajectory. As such, we model a respective 5.7% and 12.4% property management revenue 2022-27 CAGR for CGS and GSG, down from 12.9% and 15.7% previously. Also, we expect the two firms’ VAS to nonproperty owners to downsize under property developers’ ongoing liquidity strains. However, we think both firms should see recovery in VAS to homeowners as demand rebounds under normalized services. Although we fine-tuned our valuation for CGS and GSG, we still view both firms’ shares as cheap, as their decent profitability warranted by asset-light business models have not been fully priced in.

Property management revenue for both firms maintained double-digit year-on-year growth for the first half (10.9% for CGS and 20.4% for GSG) as GUM from third parties ramped up. That said, we caution CGS’ heavier reliance on sister developer Country Garden Holdings, or CGH, which accounted for over 40% of segment income compared with 14% for GSG from Greentown China. Given CGH’s financial distress, we foresee CGS to register slower growth than GSG in the long run. For profitability, both firms’ segment gross margins remained stable but GSG’s 13.8% lagged CGS’ 26.0%. While GSG may continue to see lower margin due to more governmental projects and less cost efficiency, both firms’ margins should gradually decline amid rising labor costs and slowing revenue growth, in our view.