CMB International Global Markets | Equity Research | Company Update PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE MORE REPORTS FROM BLOOMBERG: RESP CMBR OR .hk China Property Service Sector Jeffrey Zeng (852) 3916 3727 .hk Xiao Xiao (852) 3761 8952 .hk Zhang Miao .hk Stock Data Mkt Cap (HK$ mn) 14,438 Avg 3 mths t/o (HK$ mn) 190.39 52w High/Low (HK$) 29.40/ 2.90 Total Issued Shares (mn) 3,078 Source: Bloomberg Shareholding Structure Sunac Holdings 66.36% Free float 33.64% Source: HKEx Share Performance Absolute Relative 1-mth -34.2% -31.9% 3-mth -41.7% -38.6% 6-mth -71.4% -67.8% 12-mth -82.3% -77.2% Source: Bloomberg 12-mth Price Performance Source: Bloomberg Auditor: PwC 010203040M ar-2 1 J u n-2 1 Se p -2 1 Dec -2115 16 HK HS I (re ba s ed )(H K$)BUY (Maintain) Target Price HK$7.02 (Previous TP HK$29.80) Up/Downside +36.0% Current Price HK$5.16 31 Mar 2022 1 After a strong beat in 2021 earnings, we think its new earnings guidance of 25% CAGR in 2021-24E is better than feared given parentcos debt crisis. To achieve that, we think community VAS has high potential to grow at 50% CAGR due to its low penetration rate (measured by VAS/Managed GFA at RMB2.4/sq m in 2021 vs. industry of RMB5/sq m) to support the overall revenue growth and margin. For basic PM, the third-party expansion would drive the growth to lessen the impact of Sunacs GFA delivery and can still support 30% CAGR. After reflecting that in earnings, it is currently trading at 8x 2022E PE which we think has priced in almost all the negatives. Attractive risk/reward and Maintain Buy. Parentco risk alleviated on its transparent corporate governance: management has reiterated its independency when working with parentco. For example, it has never bought any investment products nor had any guarantee for Sunac. As for the account receivables from its parentco, it will also try their best to collect just like other companies. Community VAS would be the key to drive earnings growth: As the other two segments impacted by the property downcycle and debt crisis, Community VAS would take the lead to drive future growth. We think there is ample room to increase as its current VAS/managed GFA was only RMB2.4/sq m, much below industry average of RMB5/sq m. This implies very low penetration rate as Sunac services just started. We forecasted its VAS/managed GFA to catch up with industry by 2024E at RMB5/sq m. Together with decent GFA growth, we expect Community VAS to grow 58% CAGR in 2021-24E and contribute 12% of total revenue by 2024E. Commercial operation could be a surprise in the mid-to-long term: After acquiring Sunacs commercial operation arm last year, the Company has managed its malls and achieved 25% growth in retail sales and rental income of RMB1bn. In addition, it also successfully expanded five third-party malls via light asset model, which is even more than its own opening last year. If the light asset model is sustainable, we believe Sunac Service may grow more meaningfully in the future (GPM as high as 75%). Maintain Buy: We cut 2022/23E revenue by 26%/37% to reflect a slower GFA delivery from parentco and stagnant growth in non-owner VAS. GPM/NPM is estimated to see 3/2ppt YoY contraction in 2022E due to mix change (less non-owner VAS that has higher margin) but remain stable afterwards. As a result, we cut net profits of 2022/23E by 24%/39% to RMB1.5bn/1.9bn and it implies 21% NP growth CAGR in 2021-24E. Our new target price is HK$7.02/share (+36% upside) based on 12x 2022E PE reflecting parent risk. Earnings Summary (YE 31 Dec) FY20A FY21A FY22E FY23E FY24E Revenue (RMB mn) 4,625 7,904 10,553 13,182 15,989 YoY growth (%) 63.6 70.9 33.5 24.9 21.3 Net income (RMB mn) 597 1,276 1,509 1,876 2,283 EPS (RMB) 0.25 0.41 0.49 0.61 0.74 YoY growth (%) 113.2 65.4 18.3 24.3 21.7 Consensus EPS (RMB) 0.53 0.80 1.17 2.17 3.17 P/E (x) 17.3 10.5 8.8 7.1 5.8 P/B (x) N.A. 1.6 1.6 1.7 1.8 ROE (%) 6.2 15.0 18.2 23.4 31.4 Net gearing (%) Net cash Net cash Net cash Net cash Net cash Source: Company data, Bloomberg, CMBIGM estimates Sunac Services (1516 HK) Very attractive risk/reward after earnings outlook reset; Maintain Buy 31 Mar 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2 Figure 1: 2021 results summary Source: Company data, CMBIGM 2021 results beat: The Company delivered 114% YoY growth in 2021 earnings at RMB1.3bn, beating its profit alert of 100% by 14ppts and is one of the fastest growing PM companies. The total revenue grew 71% YoY to RMB7.9bn in 2021 mainly driven by its Community VAS segment (+188% YoY), growth in its basic PM segment (+64% YoY) and new business segment community operational services (+6527% YoY). GP Margin boosted 3.9ppt YoY to 31.5% in 2021. NPM also widened 3.2ppt YoY to 16.1% in 2021. EPS was RMB0.41/share (+64% YoY) and the Company declared a dividend of RMB0.124/share (+114% YoY), representing a 30% dividend payout ratio (+7ppts YoY). GP margin rose to 32% in 2021: This GPM increase is mainly driven by PM services at 25.7% (+4.1ppts YoY) and commercial operational services at 79.2% (+58.3ppts YoY). This increase is due to GFA brought scale effect/cost reduction (and digitalization) and the consolidation of Rongle Times in early 2021. Basic PM: PM segment recorded RMB4.5bn in 2021 (+64% YoY) mainly driven by increase in third-party revenue of RMB1.4bn (+112% YoY). The GFA contributed by third-party accounted for 37% (+5ppts) in 2021. The Company gave guidance that third-party GFA will make up 50% by 2024. This is needed for making up of slowed sales from parent co and anticipating a slower parent co GFA conversion rate. Community VAS: In 2021, the Companys community VAS segment grew 188% YoY to RMB507mn, mainly driven by convenience services (+596% YoY to RMB67mn in 1H21), brokerage business (+175% YoY) and home decoration (+142% YoY). Its contribution to the 2021 group revenue has doubled to 6% vs. 4% in 2020, which has beat our expectation (5% in 2021E). R M B m n 2020 2021 Y oY D i f f . v s . E s t i m a t eR e v e nu e 4 , 6 2 5 7 , 9 0 4 71% - 1 1 %- P M 2 , 7 7 4 4 , 5 3 9 64%- V A S t o n o n - p r o p e r t y 1 , 6 7 3 2 , 6 8 2 60%- C o m m u n i t y V A S 176 507 188%- C o m m e r c i a l 3 176 6527%G r o s s p r o f i t 1 , 2 7 6 2 , 4 9 1 95%N e t prof i t 597 1 , 2 7 6 114% 2%E P S ( R M B ) 0 . 2 5 0 . 4 1 64%D P S ( R M B ) 0 . 0 6 0 . 1 2 114%D i v i d e n d p a y o u t r a t i o 2 3 . 2 % 3 0 . 2 % 7 p p tG P M a r gi n 2 7 . 6 % 3 1 . 5 % 3 . 9 pp t 4 pp tN e t M a r gi n 1 2 . 9 % 1 6 . 1 % 3 . 2 pp t 2 . 1 pp tM a n a g e d G FA ( m n s q m ) 1 0 5 . 4 2 1 4 . 7 104%C o n t r a c t e d G FA ( m n s q m ) 2 3 2 . 1 3 5 8 . 0 54%31 Mar 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 3 Figure 2: PE trend Source: Bloomberg Figure 3: PM sector comps Source: Bloomberg, CMBIGM C om pa ny Ti c k e r C M B I r a t i ng TP La s t pri c e M k t C a p( H K $ ) ( H K $ ) ( H K $ m n) 21A 22E 23E 22E 23EC o u n t r y G a r d e n S e r v i c e s 6 0 9 8 H K BUY 4 7 . 6 3 4 . 4 1 1 5 , 5 7 3 2 0 . 4 1 4 . 8 1 0 . 6 4 5 . 1 3 8 . 5 C R M i x C L i f e s t y l e 1 2 0 9 H K BUY 5 6 . 0 3 8 . 4 8 7 , 6 4 8 4 6 . 2 3 3 . 0 2 4 . 5 3 7 . 7 3 4 . 4 A - L i v i n g 3 3 1 9 H K H O LD 3 4 . 2 1 1 . 7 1 6 , 5 8 6 5 . 5 4 . 5 3 . 5 2 4 . 9 2 6 . 1 G r e e n t o w n S e r v i c e s 2 8 6 9 H K H O LD 7 . 9 7 . 9 2 5 , 6 4 1 2 2 . 5 1 8 . 8 1 4 . 8 2 0 . 9 2 8 . 6 E v e r S u n s h i n e 1 9 9 5 H K H O LD 1 2 . 7 1 0 . 7 1 8 , 8 2 2 2 3 . 3 1 6 . 6 1 2 . 1 4 3 . 4 3 8 . 1 P o l y S e r v i c e s 6 0 4 9 H K H O LD 5 3 . 4 5 7 . 2 3 1 , 6 2 3 2 9 . 5 2 3 . 8 1 8 . 7 2 3 . 5 2 6 . 8 S - E n j o y 1 7 5 5 H K S E LL 3 4 . 6 9 . 4 8 , 1 8 0 9 . 6 7 . 3 5 . 5 3 3 . 1 3 6 . 0 P o w e r l o n g C o m m e r c i a l 9 9 0 9 H K BUY 3 3 . 2 6 . 2 3 , 9 8 0 7 . 2 5 . 1 3 . 9 3 8 . 3 3 3 . 3 E x c e l l e n c e C M 6 9 8 9 H K BUY 1 4 . 9 4 . 1 4 , 9 6 7 7 . 4 5 . 3 3 . 9 3 6 . 6 3 2 . 2 C e n t r a l C h i n a N e w L i f e 9 9 8 3 H K BUY 1 2 . 9 4 . 4 5 , 5 7 2 7 . 2 5 . 4 4 . 1 3 1 . 7 3 0 . 4 S i n o - O c e a n S e r v i c e s 6 6 7 7 H K BUY 7 . 1 3 . 9 4 , 5 9 4 9 . 0 6 . 2 4 . 6 4 3 . 7 3 6 . 4 N e w H o p e S e r v i c e s 3 6 5 8 H K BUY 4 . 4 2 . 3 1 , 9 0 5 8 . 1 4 . 8 NA 5 5 . 5 NAR e d s u n S e r v i c e s 1 9 7 1 H K BUY 9 . 4 3 . 0 1 , 2 2 4 6 . 4 4 . 3 3 . 0 5 0 . 2 4 4 . 1 E v e r g r a n d e S e r v i c e s 6 6 6 6 H K BUY 1 0 . 4 2 . 3 2 4 , 8 6 5 5 . 6 4 . 2 3 . 2 3 2 . 1 3 1 . 2 S u n a c S e r v i c e s 1 5 1 6 H K BUY 7 . 0 5 . 2 1 5 , 8 8 5 1 0 . 5 8 . 8 7 . 1 4 5 . 8 3 7 . 7 C O P H 2 6 6 9 H K NR NA 9 . 5 3 1 , 2 9 1 3 3 . 8 2 4 . 5 1 8 . 8 3 8 . 9 3 0 . 0 T i m e s N e i g h b o r h o o d 9 9 2 8 H K NR NA 2 . 4 2 , 3 4 6 4 . 8 2 . 6 2 . 2 3 9 . 9 3 0 . 1 A o y u a n H e a l t h y L i f e 3 6 6 2 H K NR NA 1 . 9 1 , 3 5 1 2 . 9 2 . 0 1 . 6 4 1 . 3 3 1 . 2 S h i m a o S e r v i c e s 8 7 3 H K NR NA 4 . 4 1 0 , 8 1 1 6 . 9 4 . 9 3 . 5 4 0 . 7 3 8 . 2 K W G L i v i n g 3 9 1 3 H K NR NA 3 . 0 6 , 1 1 2 6 . 9 4 . 9 3 . 7 4 0 . 3 3 0 . 4 J i n k e S m a r t S e r v i c e s 9 6 6 6 H K NR NA 2 8 . 3 1 8 , 4 7 6 1 3 . 6 9 . 2 6 . 4 4 7 . 8 4 1 . 7 A v e r a ge 2 3 . 8 1 7 . 5 1 3 . 0 3 8 . 0 3 4 . 2 P / E N e t prof i t grow t h ( % )31 Mar 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 4 Financial Summary Income statement Cash flow summary YE 31 Dec (RMB mn) FY20A FY21A FY22E FY23E FY24E YE 31 Dec (RMB mn) FY20A FY21A FY22E FY23E FY24E Revenue 4,625 7,904 10,553 13,182 15,989 Profit before tax 817 1,785 2,110 2,622 3,192 Property management services 2,774 4,539 6,540 8,346 10,053 D&A 82 NA 72 79 84 VAS to non-property owners 1,673 2,682 2,973 3,284 3,613 Change in working capital 270 NA (1,152) 1,327 1,202 Community VAS 176 507 811 1,276 1,993 Others (151) NA (485) (601) (715) Commercial 3 176 229 275 330 Net cash from operating 1,018 NA 546 3,426 3,763 Cost of sales (3,349) (5,413) (7,513) (9,371) (11,314) Gross Profit 1,276 2,491 3,041 3,810 4,675 Capex (13) NA (40) - - Capital Injection - NA - - - Other income 57 67 2 2 - Others (1,358) NA (1,581) (2,500) (3,000) Selling expenses (29) (69) (63) (79) (96) Net cash from investing (1,371) NA (1,622) (2,500) (3,000) Administrative expenses (502) (749) (950) (1,186) (1,439) Other gains/(losses) 11 92 100 100 100 Equity raised 7,592 NA - - - Impairment (15) (196) (32) (40) (48) Change of debts (713) NA - - - Operating profit 798 1,637 2,098 2,607 3,192 Others 1,750 NA (453) (563) (685) Net cash from financing 8,629 NA (453) (563) (685) Finance cost 10 138 - - - Net change in cash 8,277 (4,059) (1,529) 363 78 Pre-tax Profit 817 1,785 2,110 2,622 3,192 Cash at the beginning of the year 1,090 9,363 5,304 3,775 4,139 Income tax (195) (426) (504) (626) (763) Exchange difference (4) - - - - PROFIT FOR THE YEAR 622 1,358 1,606 1,995 2,429 Cash at the end of the year 9,363 5,304 3,775 4,139 4,217 Non-controlling interest 25 82 96 120 146 Net Profit attribute to shareholders 597 1,276 1,509 1,876 2,283 Key ratios YE 31 Dec FY20A FY21A FY22E FY23E FY24E Balance sheet Sales mix (%) YE 31 Dec (RMB mn) FY20A FY21A FY22E FY23E FY24E Property management services 60.0 57.4 62.0 63.3 62.9 Non-current assets 1,950 3,249 3,700 4,250 4,500 VAS to non-property owners 36.2 33.9 28.2 24.9 22.6 Property, plant and equipment 59 122 150 180 200 Community VAS 3.8 6.4 7.7 9.7 12.5 Others 1,892 3,127 3,550 4,070 4,300 Commercial 0.1 2.2 2.2 2.1 2.1 Total 100.0 100.0 100.0 100.0 100.0 Current assets 11,009 10,219 11,367 12,272 13,248 Inventories 41 58 80 100 113 Profit & loss ratios (%) Trade and other receivables 1,389 4,405 7,437 7,959 8,844 Gross margin 27.6 31.5 28.8 28.9 29.2 Cash and cash equivalents 9,369 5,304 3,775 4,139 4,217 Net margin 12.9 16.1 14.3 14.2 14.3 Others 211 452 74 74 74 Effective tax rate 23.9 23.9 23.9 23.9 23.9 Total assets 12,959 13,468 15,068 16,522 17,748 Growth (%) Revenue 63.6 70.9 33.5 24.9 21.3 Current liabilities 2,956 4,546 6,449 8,317 10,416 Gross profit 77.1 95.3 22.1 25.3 22.7 Trade and other payables 1,779 2,745 3,982 5,060 6,223 Operating profit 123.8 105.2 28.2 24.3 22.4 Others 1,177 1,801 2,467 3,256 4,194 Net profit 121.1 113.9 18.3 24.3 21.7 Non-current liabilities 272 250 250 250 250 Balance sheet ratios Deferred income tax liabilities 81 161 161 161 161 Current ratio (x) 3.7 2.2 1.8 1.5 1.3 Others 191 89 89 89 89 Receivable turnover days 107 201 256 219 0 Total liabilities 3,228 4,795 6,699 8,567 10,666 Returns (%) ROE 6.2 15.0 18.2 23.4 31.4 Equity to shareholders 9,680 8,502 8,294 8,000 7,272 ROA 4.6 9.5 10.0 11.4 12.9 Non-controlling interests 51 171 75 (45) (190) Per share Total Equity 9,731 8,673 8,369 7,956 7,082 EPS (RMB) 0.25 0.41 0.49 0.61 0.74 DPS (RMB) N.A. 0.12 0.15 0.18 0.22 BVPS (RMB) 4.04 2.74 2.68 2.58 2.35 Source: Company data, CMBIGM estimates 31 Mar 2022 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 5 Disclosures & Disclaimers Analyst Certification The research analyst who is primary responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report. CMBIGM Ratings BUY : Stock with potential return of over 15% over next 12 months HOLD : Stock with potential return of +15% to -10% over next 12 months SELL : Stock with potential loss of over 10% over next 12 months NOT RATED : Stock is not rated by CMBIGM OUTPERFORM : Industry expected to outperform the relevant broad market benchmark over next 12 months MARKET-PERFORM : Industry expected to perform in-line with the relevant broad market benchmark over next 12 months UNDERPERFORM : Industry expected to underperform the relevant broad market benchmark over next 12 months CMB International Global Markets Limited Address: 45/F, Champion Tower, 3 Garden Road, Hong Kong, Tel: (852) 3900 0888 Fax: (852) 3900 0800 CMB International Global Markets Limited (“CMBIGM”) is a wholly owned subsidiary of CMB International Capital Corporation Limited (a