Country Garden Holdings and Country Garden Services: Transferring Coverage; Both Shares Underpriced

We transfer coverage of Country Garden Holdings 02007 and Country Garden Services with no moat and stable moat trend ratings for both. CGH has been one of the largest real estate developers in China over the past few years, while CGS became the leading property management service firm following the spinoff from CGH in 2018. Despite CGH’s leadership in housing sales, we think it will see tempered sales growth recovery amid a slow rebound in housing demand in lower-tier cities of China. Nonetheless, we are more positive on the top-line growth of CGS given increasing gross floor area under management acquired outside CGH, coupled with a rising contribution from quickly emerging value-added services. Our fair value estimates of HKD 2.80 for CGH and HKD 42.50 for CGS remain unchanged, and we view both firms as undervalued. That said, shares of CGS are more attractive with more than 100% upside versus around 20% for CGH, and we believe CGS warrants a more stable dividend payout given the higher resiliency of its fee-based revenue structure.

As the controlling owner of both firms sold holdings in CGS to replenish CGH’s liquidity in 2022, investors may be concerned that CGS is used as the financing vehicle for CGH. That said, we think this sale will not likely recur on the back of improving funding availability of CGH, and both firms will retain solid cash balances over the next few years.