With CGS’s another solid beat, we are very confident on its >RMB100bn revenue target by 2025E (50% CAGR) as 1) contracted GFA to exceed 1.3bn sq m in 2021E after acquiring Languang; 2) step into commercial property managements which is another blue sea; 3) fast-growing VAS via offering more comprehensive services (e.g. community group shopping, insurance) to increase VAS/sq m to RMB30; and 4) city services to further widen BtoG and BtoB business connection. As a result, we revise up 2021/22E earnings by 10-17% and lift TP to HK$91.2. Reiterate CGS as our Top Pick on growth visibility and VAS.
- 2020 earnings a solid beat: CGS delivered a strong 2020 net profits at RMB2.7bn (+61% YoY), 11% higher than the profit alert and our estimates. The beat mainly came from the GPM which benefited from higher contribution from VAS. Total revenue grew 62% YoY mainly driven by basic PM business (+63% YoY) and Community VAS (+100% YoY). GPM expanded 2.4ppt YoY partly due to government subsidies. As a result, EPS increased by 56% YoY reaching RMB0.976/share and the Company declared RMB0.219/share dividend which is equivalent to 23% payout ratio.
- The road to RMB100bn revenue by 2025: Management guided that CGS targets to exceed RMB100bn revenue by 2025E, out of which basic PM contributed RMB50bn, VAS RMB30bn and city services RMB20bn. This implies about 50% CAGR and the key growth engines shifted to Community VAS and City Services at 77%/86% CAGR. Besides, with VAS’s high margin to support, we expect core net profits could achieve similar growth rates. In particular, we estimate 56% CAGR for 2020-23E earnings growth.
- VAS the new growth engine: CGS achieved 100% growth in 2020 Community VAS business with VAS/sq m improving to RMB4.6/sq m (in line with our forecast). Looking forward, the Company will develop community VAS into a RMB30bn-revenue business via 1) more VAS services: management targeted to increase services offerings such as Community group shopping, insurance, asset management and brokerage. 2) Higher residents penetration in the mature community by making use of big data. 3) Upstream business acquisition. Together with CGS’s strong execution, we think its VAS/sq m may increase to RMB30/sq m, closer to US / Japan in the future which will pave the way to reach RMB30bn revenue.
- Earnings and TP change: We revised up 2021/22E revenue by 22-32% reflecting higher-than-expected growth in VAS and city services, and thus increase 2021/22E net profits by 10-17% YoY accordingly. By applying 35x 2022E PE multiple (unchanged), we derived the new TP of HK$91.2/share.
