【Company Research】CG Service (6098 HK) – The stronger gets stronger

• 81% earnings growth in FY19. In FY19, CG Service recorded a revenue of RMB9,645mn, up 106% YoY. Gross margin declined from 37.7% in FY18 to 31.6%. This was mainly due to the new business segment “Three Supplies and PM” starting to generate revenue in FY19, and its margin was low at the beginning of the development. Excluding the new business effect, gross margin was 35.9%. Net profit to shareholders grew 81% to RMB1,671mn, representing net margin of 18.6%.

 

• Bigger and bigger. By end-FY19, contracted GFA and managed GFA of the Company was 685mn sq m and 276mn sq m, representing Reserve/Managed GFA is 1.5, showing a strong growth visibility in the near term. The Company now covers more than 350 cities and manages a total of 2,405 properties and provides property management services to 3.46mn property owners and tenants. 25% of PM business revenue was generated from third parties in FY19, compared to 11% in FY18. Other than the project delivery from Country Garden (2007 HK, BUY), third parties expansion is becoming the Company’s another growth driver.

 

• Growing of new PM business. The Company established a JV in 2018 to operate “Three Supplies and Property Management” business. Such business has both managed and contracted GFA of 84.9mn sq m by end-FY19. As the business is at its initial stage of development, gross margin is only 8.6% in FY19. However, as the business model becomes stable, the Company plans to steadily increase the margin and profit. The Company is also ambitious about the urban service to help local governments in their daily maintain of the public facilities. CG Service has put a lot of effort in non-residential PM. With its leading position in the industry, we believe the Company has clear advantage over mid-to-small PM companies, as locals are more willing to work with a big player.

 

• Long term winner, maintain BUY. We believe the current trend in the PM industry is the stronger gets stronger. CG Services, holding a vast project coverage and backed by the Country Garden, has a broad prospect and better growth visibility. We revise up our FY20/21E EPS forecast by 9.1/23.8% to RMB0.78/1.11. However, due the recent market sentiment, we trim our FY21 target P/E multiples from 38x to 30x. Thus our TP was HK$37.06. Maintain BUY.