We think the Company will deliver a stronger-than-expected 2020E core profits (excl. listing expenses) to grow 50% YoY to RMB88mn vs. the market expectation of 40%. The beat may come from the solid value-added services on back of an accelerated advertisement and agent business in 2H20E (in line with the macro recovery). As a result, we revised up the 2020/21/22E earnings by 16%/4%/3.5% to reflect the fast growth of VAS and estimate its contribution to total GP to reach 35% by 2022E. This would drive the re-rating (currently at 11x 21E PE) due to VAS’s high margin and room for growth. Reiterate Buy and raised TP to HK$9.17.
- Managed GFA to grow 60% YoY to reach 25mn sq m in 2020E: We believe the expansion is achievable given 12mn sq m reserved GFA and active expansion via bidding and M&A in 2H20. This would offset the growth slowdown of non-residents services revenue (due to more third-party projects).
- VAS could become the new growth engine: The Company has achieved 261% growth in 1H20 on the agent business (secondary market + car parks) which has 50%+ GP margin. In 2H20E, the advertisement business is recovering fast and will further drive the revenue growth. With the growth of GFA and improving VAS penetration rate, we estimate VAS to grow 134% CAGR to reach RMB343mn in 2020E and contribute 35% of Group at GP level.
- Major shareholder increased stakes to show support: After market close of 21 Dec, the Company announced that its Chairman Mr. Zeng increased 166,000 shares at a price of HK$4.67/share and owned 72.33% stakes after that.
- Bullish on the sector and Time to accumulate: On policy front, MOHURD recently announced “18 points” to support PM firms merging online and offline services. Our view is that this would gradually make service providers an internet traffic entrance to connect residents to outside vendors so its business model in the future may be more towards riding on the service transaction fees. On the fundamental front, we expect overall sector will deliver another solid earnings growth in 2020E and will start to see some positive profit alerts in January as short-term catalysts. The key earnings differentiation will be on the value-added services. On the valuation, it turns attractive as we start to look at 2022E valuation now and overall sector is currently only trading at 15x.
- Raise TP to HK$9.17 using 22x 21E PE; Reiterate BUY. Currently it’s trading at 11x 2021E vs. industry average of 19x PE and 14x for small-mid tier players.
