A-Living delivered an in-line 2020 results with core earnings up 43% YoY to RMB1.8bn. Management guided 40% revenue and earnings CAGR in 2020-23E which we think is achievable based on its aggressive M&A. However, we remain cautions on its seemingly ambitious plan to build two RMB100bn-worth business segments – PM (incl. City Services) and VAS given growth slowdown in managed GFA, relatively lower profitability of city services and unproven track record of VAS. We think a strong execution would be needed to achieve these goals. Maintain Hold rating.
- 2020E results in line with profit alerts and our estimates. The core net profits in 2020 came at RMB1,8bn (+43% YoY), in line. Total revenue grew 100% YoY to RMB10.3bn, mainly driven by fast growth in managed GFA (+112% to 3.7bn sq m) and Community VAS (+117% YoY) from low base. GPM declined by 7.7ppt YoY to 29% across all segments (VAS to non-property owners declined the most by 9.7ppt). As a result, Core EPS grew 44% YoY to RMB1.35/share and the Company declared RMB0.52/share dividend, which is equivalent to 40% dividend payout ratio, down from 48% in 2019.
- Management targets a promising outlook for city services after announcement of five cleaning Co. acquisitions. Management guided it has obtained a strong contract pipeline for City services worth annualized RMB2bn revenue. To further penetrate this area, it has also acquired five cleaning companies with a total consideration of RMB1.17bn cash at a 2021E PE of ~10x. They may contribute another attributable revenue of RMB1bn in 2021E with average NPM of 12.5%. We admit that this segment can reach sizable however remain cautious as 1) the relatively lower profitability compared to other segments. 2) Some cleaning business could be asset heavy. 3) It is defensive in nature so may not be the fuel for rerating.
- Ambitious plan but a strong execution is needed. During the conference call, the Company mentioned to build two platforms worth RMB100bn each – 1) PM + City Services; 2) Community VAS. On the first segment, we think increase in managed GFA would gradually slow down due to high base and fierce competition (21% CAGR to reach 550mn sq m in 2022E) so the key focus would be the city services, which still faces profitability uncertainty and business model exploration. As for the latter one, the contribution of Community VAS was only 10% in 2020 and it takes time to grow and build up.
- Earning and TP change: We revise up 2021/22E earnings by 20-40% mainly reflecting the M&A in city services segment. However due to the low profitability of city services and uncertainty in M&A, we lower the target 2022E PE multiple to 11x (previously 15x) and derive TP of HK$34.23. Maintain Hold.
