After market close of 4 Feb, S-Enjoy released a profit alert citing >50% YoY growth in 2020E net profit, in line with its guidance and consensus estimates. We believe actual 2020 earnings could be even higher, at RMB 450mn or +60% YoY on VAS outperformance. Currently S-Enjoy is trading at 16x 2022E, a discount to market leaders of above 25x, but we think it deserves a rerating to narrow the discount on two valuation drivers. 1) Improving third party expansion: 40% of newly-added GFA under management comes from third party (already higher than industry average of 30%) to clear doubts of sales slowdown by its parentco; 2) Fast VAS growth to make a higher contribution of revenue (13% in 2020E vs. 9% in 2019 and closer to industry average of 15-17%). Therefore we maintain Buy rating. Catalysts: inclusion of HK-connect (to be announced on 26 Feb); 2020E earnings beat in March.
- Improving third-party expansion capability to support long-term growth. S-Enjoy used to rely heavily on Parentco’s support on expansion of GFA under management (~70% were from Parentco’s sales). Since 2020, the Company has tried to enforce third party expansion by increasing the incentives plan (20-30% of first-year net profit of the bidding GFA) for expansion team as bonus to match with market leaders. We started to see improving results as 40% of newly-added GFA under management came from third party in 2020 vs. 20% in the previous years, 30% of industry average and closer to market leader Ever Sunshine of >60%. This would clear some doubts on the sales slowdown of its parentco and support the long-term growth. As of 2020 End, it grew its managed GFA by 66% YoY and had a reserved/managed GFA ratio of 100%, both top of the industry.
- Fast VAS growth on fast GFA expansion and new offerings. As mentioned above, S-Enjoy’s fast GFA expansion would help drive its residents base and thus benefit VAS growth. Also, it tried new offerings such as catering (office) and elevator maintenance (it signed contract with top elevator service providers to take commissions) to improve monetization. Looking ahead, we expect overall VAS to grow 56% CAGR in 2019-22E and its revenue contribution would improve to 13%, catching up with industry.
- Likely addition to stock connect as another catalyst. S-Enjoy has satisfied the criteria of HK$5bn market cap for the past one year and thus there’s a high probability of being included this time.
- Current valuation of 16x 2022E P/E attractive. Currently it’s trading at 16x 2022E P/E, which is lower than the industry average of 22-25x. We believe its improving third party expansion and VAS potential would help narrow the gap with market leaders and reiterate Buy.
