【Company Research】A-Living (3319 HK) – Brand new group with full property management (PM) coverage
- Re-rating during the past two months. Since the announcement of acquisition of CMIG PM/ New CMIG PM, A-Living’s share price has largely outperformed the peers. We believe this was mainly attributed to valuation recovery. For a long time A-Living’s valuation was 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 size compared to tier-1 PM names. But as the acquisition is completed, organic growth will play a more 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. All major drawbacks can be resolved.
- Evolve through M&A, new positioning of A-Living. As the target company is a large PM holding platform, we believe consolidation of CMIG / New CMIG PM and A-Living is the Company’s top priority in the near term. The acquisition is not a simply profit add up. We are expecting a huge synergy and strong capability of organic growth to be created. A-Living will thereafter expand and acquire third-party projects as a PM group with rich brands and sophisticated companies, rather than expanding alone like before. A-Living is accordingly switching its expansion strategy from M&A to organic growth. We believe, after large cash expenditure, the Company would cool down a while in M&A. But, in the meanwhile, in our view, A-Living has incentive to increase share interest in each acquired subsidiary/associate as part of the consolidation plan. The bottom line is, through this mega M&A, A-Living is evolving into a large comprehensive PM Group with full coverage of PM service. This should uplift the Company’s profit as well as valuation in the long run.
- Non-residential PM, a new market for listcos. Most PM listcos are still residential PM focused. According to our forecasts, by the year of 2021, market size of PM will break through RMB1tn, of which non-residential PM would account for RMB440.0bn. This is an equally large market compared to residential PM. Non-residential PM will be the other market for listcos. In fact, large PM listcos like CGS (6098 HK, NR), COPH (2669 HK, HOLD) and POLY PM have already been expanding in this field. Within A-Living’s acquisition package, there are some leading non-residential PM companies, like Shanghai Minghua. Minghua is a leading PM company of high-end public building management in Shanghai, managing numerous landmarks and transportation infrastructures in Shanghai, including China Art Museum and Hongqiao Comprehensive Transportation Hub. We believe A-Living has made a head start in the competition.
- Reiterate top pick status. We reaffirm A-Living as our Top Pick in property management sector as its valuation is still attractive and we look forward to the inclusion of HK-Stock Connect in the next review. Furthermore, the acquisition largely enhances the Company’s competitiveness in fragmented PM markets, especially non-residential PM market, which we believe is the next new industry focus. We maintain our earnings forecast unchanged but raise our FY20 P/E target multiple to 23x. Thus our TP is HK$33.08. Maintain BUY.
