【Company Research】COPH (2669 HK) – A key player with unexplored potential

• 34% earnings growth in FY19. Driving by increased PM business scale and growing VAS, COPH recorded a revenue of HK$5,466mn in FY19, up 32% YoY. Overall gross margin was stable at 20.0% (FY18:20.4%). Thanks to refined management structure, SG&A to revenue improved from 8.3% to 7.3%. Net profit grew 34% to HK$538mn, representing net margin of 9.8%.

 

• Growth in GFA is slow but visibility is still strong. In FY19, total managed GFA increased by 7.5% or 10.5 mn sq m to 151.4mn sq m from end-FY18. The increase is lower than our expectation. We think this was mainly due to the slow paced project delivery from COLI/COGO. But with ample land bank of COLI/COGO, the growth in the future is still firm and locked in. COLI/COGO has recorded 17.94mn sq m sales volume in FY19. We expect there will be a time when GFA dramatically increases. During the year, the segment gross profit margin from regular property management contracts under lump sum basis was 10.2%. The margin is significantly lower than peers’, but downside risk is limited as well. Although growth of COPH may seem slow, its large SOE background, steadiness and limited downsides, are the highlights of the Company. We expect a potential SBC incentive program could motivate the Company.

  

• Good sign in VAS. In FY19, the Company has established PM management services as the core foundation, 1) community assets and services operating platform led by “U+” (优你互联); 2) engineering services spearheaded by “Xinghai Wulian” (兴海物联); 3) asset management; and 4) investments, mergers and acquisitions are the four growth engines. The Company used to be lagging in VAS but now it is making progress. The Company has reclassified the VAS business segments to match the industry’s practice. In FY19, the proportion of revenue from VAS out of total revenue increased from 21.4% in FY18 (restated) to 24.6%, and largely increased by 50.7% to HK$1,348mn, of which sub-segment revenue from VAS-to-non-residents and VAS-to-residents increased by 57.4% and 38.2%. This will be a profit booster in the future given the Company’s vast project coverage serving 5mn residents in 104 cities (VAS-to-residents) and COLI/COGO backed position (VAS-to-non-residents).

 

• Key player with unexplored potential, Maintain BUY. Although growth of COPH is relatively slower than the new players, there is no doubt that COPH will always be a key player in the market.  Its China Overseas Group/SOE background gives the Company a huge economic moat in PM of public projects and growth guarantee. With its vast coverage in tier1/2 cities, VAS also has so much to explore. We look forward to seeing the Company to motivate itself to realize its full potential. Time is more important than timing in investing in PM sector, especially for these larger players. We raise our earnings forecast for FY20/21E by 4.2%/13.0% to HK$693mn/HK$866mn.  Given 30x FY21 P/E our TP is raised to HK$7.91. Maintain BUY.