【Company Research】Greentown Service (2869 HK) – Earnings depends on VAS

• 6% adj. earnings growth in FY19. In FY19, Greentown Service recorded a revenue of RMB8,582mn, up 28% YoY. Gross margin remained stable at 18.0% compared to 17.8% in FY18. Selling and marketing expenses increased by 155% in FY19 due to the expansion of new VAS services. Excluding the effect of SBC (FY18/19: RMB26.4mn/RMB62.5mn), adj. net profit to shareholder grew 6% from RMB510mn to RMB540mn, which is slightly above our forecast of RMB531mn. By end-FY19, Greentown Service had a managed/reserve GFA of 212/233mn sq m, indicating a strong growth in scale in the near term.

 

• Earnings depends on VAS. The Company’s PM service, consulting service, and community VAS accounted for 40.2%, 26.4% and 33.5% of total gross profit, and achieved 22.2%, 29.6% and 46.0% growth in FY19, respectively. Thus, VAS now plays an important role in the Company’s earnings growth. However, some VAS are cyclical business (sales center assistance, property agency etc.) and some new VAS could be unstable in the early stage of development, for example education business recorded loss in the first year which dragged down the overall profit. The Company’s earnings performance largely depends on the result of VAS, which could be fluctuating. But we are optimistic about the PM companies unlocking the potential of VAS. Temporary financial setback does not change the trend. And Greentown Service is leading in VAS, which should be credited.

 

• Longfor investment strengthens the cash position. Greentown Service announced on 27 Dec 2019 that the Company would introduce Longfor (960 HK, HOLD) as its substantial shareholder. Longfor had (1) purchased approx. 5% of the total issued share from the Company’ Chairman, LI, Hairong, and (2) will subscribe additional 5.3% of share placements on or before 15 Jun 2020. Upon the completion, Longfor will hold 10% of Greentown Service’s enlarged capital. Longfor will also appoint a non-executive Director. The deal is a financial investment to Longfor. But the management of Greentown Service see it as alliance with Longfor in Life Service business. We believe Greentown Service will seek deeper cooperation with Longfor afterwards. More importantly, placement of new shares will help Greentown to raise fund after a heavy investment in Community Living Servicing sub-segment. By end-FY19, Greentown’s cash on hand was RMB2,661mn and total debt was RMB483mn. Using the closing price of 2 Apr 2020 with 7.5% discount as subscription price, Greentown Service could raise approx. RMB1,100mn. 

 

• Trim earnings forecasts and maintain HOLD. The growth of the Company's PM service segment has maintained a robust growth over the past few years. With the abundant reserve GFA, we expect the momentum of PM service will carry on in FY20. However, due to the disease outbreak in 1Q20, we expect growth of consulting service and community VAS would slow down in FY20. Thus, we trim FY20/21E EPS by 13.8%/9.7% to RMB0.21/RMB0.27. Given 30x FY21 target P/E, we trim our TP from HK$10.48 to HK$9.11, maintain HOLD.