On 26 Sep 2019, A-Living announced to acquire 60% equity interests of CMIG PM and New CMIG PM at the consideration as much as RMB2.05bn, based on 12.5x P/E. We believe the acquisition will instantly expand A-Living’s business scale and enhance the capability of organic growth. After this mega deal, we expect the Company’s strategy will switch from M&A driven to organic growth. Valuation of A-Living will be re-rated accordingly.
- Expected to break into tier-1. CMIG PM/New CMIG PM is one of the largest PM services providers in China with managed GFA of 191mn sq m. Upon the transaction completion, the managed GFA of A-Living (1H19: 211mn sq m) will exceed 400mn sq m. We think the giant leap in business scale brought A-Living into tier-1 club, which helps to promote the valuation of the Company given its huge valuation gap with leading players.
- Notable brands with full coverage of PM industry. CMIG PM/New CMIG PM is a holding platform of several leading PM companies which previously acquired by CMIG PM/ New CMIG PM. CMIG PM operates property management business mainly through its seven subsidiaries and five associates companies with each having its own brand and team. New CMIG PM operates through Shanghai Kerui. (i) These PM companies cover 28 provinces, municipalities and autonomous regions with 123 cities. 34% of the managed GFA are located in YRD, 24% in Shandong Peninsula, 20% in Sichuan-Chongqing and 4% in Shenzhen. (ii) Of the acquired 191mn sq m managed GFA, 32% are Residential projects. 18% are Commercial/office and 50% are Public projects. The acquisition will diversify A-Living’s project portfolio and enable A-Living to enter certain niche PM markets.
- Expand as a group. We believe a wide range of geographic/project coverage and experienced team in each of the subsidiary and local city could largely enhance the capability of A-Living’s organic growth. A-Living will thereafter expand and acquire third-party projects as a PM group with rich brands and sophisticated companies, rather than a single company fighting alone previously. A-Living could become a large comprehensive PM platform providing full coverage of PM service.
- ST focus on consolidation; LT emphasis on organic growth. As the target company is a large PM holding platform almost the same size as A-Living, we believe consolidation of CMIG PM/ New CMIG PM and A-Living is the Company’s top priority in the near term. This is a challenging job which requires proper allocation of the group’s resources, refined management structure to ensure operation efficiency, and unify business strategy among subsidiaries. We are optimistic on the consolidation as A-Living acquired the existing holding platform and the Company is well-experienced in M&A. The RMB2.05bn deal size accounted for approx. 47% of 1H19 cash on hand of RMB4.35bn and 191mn sq m acquisition area has already fulfilled A-Living’s M&A target from 2019 to 2021 (140mn sq m in total). We expect A-Living will cooled down a while in M&A market. Furthermore, with enhanced capability of organic growth, we believe A-Living will switch its expansion strategy from M&A driven to organic growth.
- Reaffirm top pick in property management sector. For a long time A-Living’s valuation is suppressed mainly due to (i) its M&A driven strategy rather than organic growth, (ii) large portion of revenue from VAS to developers, (iii) relatively smaller scale compared to tier-1 PM names. But as the acquisition is announced and to be completed, we believe organic growth will play a more important and significant role; revenue from PM segment will instantly grow and lower the proportion of revenue from VAS to developers; and business scale will largely expand with full coverage in PM industry. These changes, in our view, will make A-Living a brand new PM platform. We believe A-Living deserves a re-rating. We reaffirm A-Living as our Top Pick in property management sector. We raise our FY19/20E earnings forecast by 09%/8.3% to RMB1,153mn/1,718mn. We roll over our P/E multiple to FY20 with 18x to derive our TP of HK$25.89. Maintain BUY.
