【Sector Research】China Property Service Sector – Worth to chip in the sector now

PM sector has seen >20% share price pull back from its recent peak and it is mainly due to the valuation correction, in line with global growth sector sell off. With increasing market uncertainty, we think the key sector valuation support has shifted to VAS and retail/rental growth as GFA growth is more of a defensive driver. On VAS, we continue to be positive on its high potential and may see an industry-average of 44% CAGR in 2019-22E contributing 35% of group GP. On retail/rental part, CR Land has shown a very positive sign of 29% YoY rental growth in Jan 2021 and may pose +60% YoY growth in 1H21 following the consumption recovery. Sector is currently trading at 17x 2022E PE vs. (+30% NP growth in 2022E, PEG of 0.6) and we think now it is a good time to accumulate. Top picks: CGS/Ever Sunshine and CR Mixc/Powerlong CM/Sino-Ocean Service.

 

• VAS leaders would see more valuation support: As our key thesis in our industry report, we think VAS progress during 2020 results announcement would be the key to watch. The reason behind is that GFA is unlikely to continue driving the sector due to the growth slowdown and fierce competition. In comparison, VAS would be the key growth engine as 1) it has high potential given 5-10 times upside from now. Currently the industry VAS per managed GFA is only RMB4/sq m on average compared to RMB50-56/sq m in US/Japan leading firms such as FirstService/Nihon Housing (despite the salary difference). 2) Currently it is at the high-growth stage in the areas of retail, advertisement and brokerage. We continue to think CGS would be VAS leader on its first-mover advantage in the upper-stream acquisitions of advertisement and brokerage companies. Recently they have launched the health insurance program in its APP via their acquired company.

 

• High-end shopping mall operator remains the key beneficiary from consumption recovery: As 2021 would be the year of consumption, we reiterate our positive view on the rental income growth of 30% for major players like CR Land, which would benefit its service unit. This is evidenced by CR Land’s January figure that shows 29% rental income growth despite a relatively high base (+15% YoY). With a gradual lowing base in 1H20 (-12% YoY) and retail sales picking up, we may see an even higher growth in 1H21 for CR Land (>60% YoY rental growth) to RMB 8bn and thereby benefits CR Mixc Lifestyle which can share 5%/10% of rental revenue/EBIT profits.

 

• HK-connect to be effective on 15 Mar as a major catalyst: On 26 Feb, Hang Seng indexes announced 8 PM names (see Figure 5) to be added in the HK-connect program. This will be effective on 15 Mar and we think the southbound money will provide some support especially for CR Mixc which is the only high-end shopping mall operator. As for the concern of recent southbound net outflow, we think it may only impact the size of inflow but not the direction.

 

• Initiation and rating change:  We upgrade Poly PM and A-living to Hold on attractive valuation. Also, we initiate Sino-Ocean service with a Buy rating on its high-end commercial operation potential. As for top picks, we continue to prefer CGS/Ever Sunshine (on VAS and high earnings visibility) and CR MixC Lifestyle/Powerlong Commercial/Sino-Ocean Service (on shopping mall).