Company Reports

Greentown Service Group, or GSG, was established in 1998 in Hangzhou mainly for the provision of property management services, or PMS, to Greentown China. GSG operates in three major business segments: 1) property management services; 2) community value-added services, or VAS, and 3) property consulting services and VAS to nonproperty owners. We consider GSG one of the leading property management and VAS providers in China, with business strength in the Yangtze River Delta.

We keep our fair value estimate for Greentown Service Group at HKD 4.20 but cut Country Garden Services’ to HKD 6.60 from HKD 9.00, given the latter’s underperformance in earnings growth for first half 2024. While GSG delivered a robust 31.0% year-on-year operating profit growth, CGS’ operating profit saw a 22.3% drop due to more headwinds in margins of property management and developer-related services. CGS’ receivable days in the first half also rose to 206 from 185 as of December 2023, but GSG’s days remained lower at 127, given its higher-quality developer clients. We raise our 2024 operating profit estimate for GSG by 12% while maintaining most of our long-term assumptions. Conversely, we cut our midcycle operating margin forecast on CGS by 180 basis points to 6.0% as we do not foresee a major turnaround in its profitability. Given the prolonged liquidity strains on most developers, we also revised our steady-state receivable days assumption on CGS up to 260 days from 240.

We view the recent favorable measures for the China real estate sector, including the scrapping of buying curbs in wealthy cities and the unwinding of the mortgage rates floor, as encouraging to homebuyers and investors. That said, we caution that potential buyers may remain on the sidelines amid falling home prices, and policy tailwinds will likely require a longer time to translate into a pickup in home sales. Additionally, although the CNY 500 billion in loans—backed by a relending facility from China’s central bank—to local state-owned enterprises for converting completed but unsold properties to affordable units should help clear excess inventory, execution risks remain, in our view. While the policy-induced rally has reflected the market sentiment shift, we maintain the valuations of stocks under our coverage, given industry fundamentals that are still weak. Despite a more demanding sector valuation, we think shares of state-owned developers such as China Overseas Land & Investment and China Resources Land remain attractive. We continue to prefer both names, given their more resilient contracted sales and better financial strength.

We lower our fair value estimates for Country Garden Services, or CGS, to HKD 9.00 per share from HKD 17.50, and for Greentown Service Group, or GSG, to HKD 4.20 from HKD 5.20, given a more conservative outlook for their margins and revenue growth. CGS reported an 85% net profit decline for 2023 due to compressed gross profit and a write-off on receivables. While GSG outperformed with 11% bottom-line growth, operating margin also contracted amid provisions for financial assets. Given the slower cash collection from developers, we lift our receivable days assumptions for both firms. We also cut our midcycle operating margin forecasts on CGS to 7.8% from 12.2%, and on GSG to 7.7% from 8.0% ,amid rising competition and labor cost.

Greentown Service Group, or GSG, was established in 1998 in Hangzhou mainly for the provision of property management services, or PMS, to Greentown China. GSG operates in three major business segments: 1) property management services; 2) community value-added services, or VAS, and 3) property consulting services and VAS to nonproperty owners. We consider GSG one of the leading property management and VAS providers in China, with business strength in the Yangtze River Delta.

We published our inaugural China real estate industry pulse for the first quarter of 2024 with the view that housing demand should gradually recover through 2026, supported by ongoing policy tailwinds. While new home sales in China remained sluggish in 2023, the nationwide average price was steadier due to a continuing mix shift to wealthier regions with more resilient prices. Moreover, we like the ramping-up of supportive measures since the second half of 2023 and expect further easing in buying restrictions and mortgage rate cuts in large cities. While share price performances could remain volatile in the near term, we see an improving risk/reward profile at the current valuation as the market may be missing key developers' improving sales outlooks. As such, we prefer top state-owned builders, China Overseas Land & Investment and China Resources Land, as both have seen better sales growth, higher asset quality, and healthier gearing ratios versus their peers.

We cut our fair value estimate on Country Garden Services, or CGS, to HKD 17.50 from HKD 42.50 and on Greentown Service Group, or GSG, to HKD 5.20 from HKD 6.50. This is mainly due to our more conservative top-line growth forecast for both firms, particularly for property management and value-added services, or VAS, to nonproperty owners. While CGS and GSG both saw expansion in gross floor area under management, or GUM, for the first half of 2023, we expect competition over high-quality third-party projects to intensify, weighing down their long-run growth trajectory. As such, we model a respective 5.7% and 12.4% property management revenue 2022-27 CAGR for CGS and GSG, down from 12.9% and 15.7% previously. Also, we expect the two firms’ VAS to nonproperty owners to downsize under property developers’ ongoing liquidity strains. However, we think both firms should see recovery in VAS to homeowners as demand rebounds under normalized services. Although we fine-tuned our valuation for CGS and GSG, we still view both firms’ shares as cheap, as their decent profitability warranted by asset-light business models have not been fully priced in.

Greentown Service Group, or GSG, was established in 1998 in Hangzhou mainly for the provision of property management services, or PMS, to Greentown China. GSG operates in three major business segments: 1) property management services; 2) community value-added services, or VAS, and 3) property consulting services and VAS to nonproperty owners. We consider GSG one of the leading property management and VAS providers in China, with business strength in the Yangtze River Delta.

No-moat Greentown Service Group's 2022 revenue and net profit had been well guided following its prior profit warning, but the market may still be disappointed by potentially lower profit margins. While GSG achieved 18% year-on-year top-line growth for 2022 thanks to the resiliency of property management income, it saw pronounced margin contraction under transitory receivable impairment and pandemic-related cost. Looking forward, we expect GSG's profitability to recover gradually, but the subdued operating efficiency of its property management and community value-added services, or VAS, remain a negative. In addition, we think GSG’s growth outlook will be weighed down by competition. As such, we trim our fair value estimate to HKD 6.50 from HKD 10.50 as we assume lower revenue growth and margins through the next decade. However, we view the long-term risk/reward balance of GSG as appealing for investors, with around 35% upside to its current valuation.

Greentown Service Group, or GSG, was established in 1998 mainly for the provision of property management services, or PMS, to Greentown China. GSG operates in three major business segments: 1) property management services; 2) property consulting services; and 3) community value-added services, or VAS. We consider GSG one of the leading property management and value-added services providers in China. After operating for over 20 years, GSG was one of the first China PMS companies listed in Hong Kong in 2016.

GSG was established in 1998 mainly for the provision of PMS to Greentown China by Song Weiping, who founded both companies. In line with peers, GSG’s operates in three major business segments: 1) property management services; 2) property consulting services; and 3) community VAS. We consider GSG one of the leading VAS providers, providing consulting services to developers and community VAS since 2000 and 2007 respectively. After operating for over 20 years, GSG was one of the first China PMS companies listed in Hong Kong, in July 2016.

Despite continued stable operating performance and consistent growth at the business end, no-moat Greentown Service Group's first-half 2022 results was dragged by higher costs. We think this has disappointed investors, when property companies are focused on cost-cutting measures in view of the weak property market. However, given the key sector concern of property management companies remains that of negative contagion from the developers' liquidity stress at the expense of the property management sector, we we think the company's positioning as a relatively more independently operated property management company may subject it to less share price pressure on related developer risks. We factor in impairment losses and lower our 2022 earnings projection by 14%, but maintain our fair value estimate of HKD 10.50 as we have already factored higher administration costs into our estimates.

China real estate activity continues to be weak into the second half, hampered by the start-stop zero-COVID-19 policy that likely limits the positive impact of policy easing. We think developers' broad-based recovery from liquidity stress is key to a durable recovery as it addresses the core issue of homebuyer confidence. However, the current credit environment remains challenging for developers. Presales activities remain at a slower pace, implying growth concerns for the property management companies, or PMCs, in terms of the prospects for future gross floor area under management.

No-moat Greentown Service Group, or GSG, reported decent full year 2021 results, which should illustrate continued stable operating performance and consistent growth. This is reflective of the property management services sector, which demonstrates resilience despite heavy headwinds in residential pre-sales. Revenue for 2021 of CNY 12.6 billion mirrors our estimate, growing 24% year on year. However, with slightly lower-than-expected gross margin at 18.5%, compared with our estimate of 19.4%, 2021 earnings of CNY 846 million were up 19% year on year, lower than our expectations. This is attributable to lower gross profit margin for community living services on higher costs of continuous adjustment product structure and consulting services on higher competition--which we expect to continue. On the back of net cash and ample cash holdings of CNY 4.3 billion, the company maintained total dividend of HKD 0.20 per share compared with the year before. We input lower gross margin assumptions and reduce our fair value estimate to HKD 10.50 from HKD 12.20 per share. 2021 gross floor area under management grew by 21% year on year to 304 million square meters, which underpinned the overall results. Management targets consistent growth to continue for 2022, on the back of scale growth by widening coverage and deepening density and penetration of services, while maintaining focus on quality of services.

GSG was established in 1998 mainly for the provision of PMS to Greentown China by Song Weiping, who founded both companies. Hence, mirroring Greentown’s positioning, GSG is a leading PMS provider in the high-end residential segment with PMS contributing about 60% of GSG’s revenue. GSG’s PMS is concentrated in East China, which contributes about 70% of total PMS revenue. In line with peers, GSG’s operates in three major business segments: 1) property management services; 2) property consulting services; and 3) community VAS. We consider GSG one of the leading VAS providers, providing consulting services to developers and community VAS since 2000 and 2007 respectively. After operating for over 20 years, GSG was one of the first China PMS companies listed in Hong Kong, in July 2016.

As an implication of the physical market weakness we view that there is likely negative contagion from the developers' liquidity stress at the expense of the property management sector. That is, a situation arising where the developers may raise liquidity or enhance credit for financing via the property management companies, or PMCs. Hypothetically, these may include the direct sale of entire/part stakes of equity holdings in related PMCs to third parties; sale of common founder stakes in PMCs for equity injection to developers; potential indirect sale with loan or bond issues encompassing conversion option to PMC stakes; interrelated deals with divestments to PMCs to raise cash; or in a worst-case scenario, interrelated loans by the related PMCs to the developers, given the lack of access to capital markets.

No-moat Greentown Service Group, or GSG’s, first-half 2021 result is in line, revenue and net profit rose 27.2% and 46.3% year on year to CNY 5.6 billion and CNY 546.7 million, respectively. This is as higher gross profit by 24.1% year on year flowed through to the bottom line. This was anchored by core property management services revenue, which grew 20% year on year during the same period.

The severe policies targeted at the China K-12 education sector look to have led to the wide-spread risk-off across equities with China exposure. Despite a stable fee income business operating with favorable policies, the property management sector was also not spared as the sector is trading on rich multiples, especially considering the pandemic environment with investors crowded in quality large scale operators. We believe the draconian measures in the education sector are driving concerns whether the China property sector, which is already under policy overhang, may see further tightening, and whether there would be further shift in policy tone for the property management sector.

No-moat Greentown Service Group, or GSG’s full-year 2020 result is in line with our expectation, in which revenue and net profit rose by 17.8% and 48.8% year on year. Topline growth is mainly attributed to GFA under management, or GUM growth which has largely not relied on M&A to boost growth with the core property management services. Hence the core PMS segment revenue increase is by 17.9% year on year, reflecting the same GUM growth during the same period to 251 million sqm. This reflects slower growth as project delivery delays are affected by the pandemic in 2020. A look through across segments reflect broad based slowing top line growth with all three segments saw slower growth than 2019, as property consulting services and community VAS revenue grew by 23% and 14% respectively. With the lack of M&A impetus during the year, the company’s revenue growth in 2020 is largely below peers. However, slight improvement in gross margin and better cost control elevated the strong bottom-line growth on revenue flow through. Nonetheless the company’s net margin remains below peers with room for cost improvement. Along with results, the company declared HKD 0.08 special dividend on top of HKD 0.12 final dividend, with the higher overall dividend above our expectation which may support near term share price.

GSG was established in 1998 mainly for the provision of PMS to Greentown China by Song Weiping, who founded both companies. Hence, mirroring Greentown’s positioning, GSG is a leading PMS provider in the high-end residential segment with PMS contributing about 60% of GSG’s revenue. GSG’s PMS is concentrated in East China, which contributes about 70% of total PMS revenue. In line with peers, GSG’s operates in three major business segments: 1) property management services; 2) property consulting services; and 3) community VAS. We consider GSG one of the leading VAS providers, providing consulting services to developers and community VAS since 2000 and 2007 respectively. After operating for over 20 years, GSG was one of the first China PMS companies listed in Hong Kong, in July 2016.