Company Reports

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.

Country Garden Services, a leading property management services company in China, was spun off into its own listing in 2018 by real estate developer Country Garden Holdings. CGS’ businesses operate in four major segments: 1) property management services, 2) community and nonproperty owner (mainly developer) value-added services, 3) “Three Supplies and Property Management” on utility supplies, and 4) city sanitation and greening services.

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.

Country Garden Services, a leading property management services company in China, was spun off into its own listing in 2018 by real estate developer Country Garden Holdings. CGS’ businesses operate in four major segments: 1) property management services, 2) community and nonproperty owner (mainly developer) value-added services, 3) “Three Supplies and Property Management” on utility supplies, and 4) city sanitation and greening services.

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.

Country Garden Services, a leading property management services company in China, was spun off into its own listing in 2018 by real estate developer Country Garden Holdings. CGS’ businesses operate in four major segments: 1) property management services, 2) community and nonproperty owner (mainly developer) value-added services, 3) “Three Supplies and Property Management” on utility supplies, and 4) city sanitation and greening services.

We transfer coverage of Country Garden Holdings and Country Garden Services with no moat and stable moat trend ratings for both. CGH has been one of the largest real estate developers in China over the past few years, while CGS became the leading property management service firm following the spinoff from CGH in 2018. Despite CGH’s leadership in housing sales, we think it will see tempered sales growth recovery amid a slow rebound in housing demand in lower-tier cities of China. Nonetheless, we are more positive on the top-line growth of CGS given increasing gross floor area under management acquired outside CGH, coupled with a rising contribution from quickly emerging value-added services. Our fair value estimates of HKD 2.80 for CGH and HKD 42.50 for CGS remain unchanged, and we view both firms as undervalued. That said, shares of CGS are more attractive with more than 100% upside versus around 20% for CGH, and we believe CGS warrants a more stable dividend payout given the higher resiliency of its fee-based revenue structure.

Country Garden Services, a leading property management services company in China, was spun off into its own listing in 2018 by real estate developer Country Garden Holdings. CGS’ businesses operate in four major segments: 1) property management services, 2) community and nonproperty owner (mainly developer) value-added services, 3) “Three Supplies and Property Management” on utility supplies, and 4) city sanitation and greening services.

We maintain our fair value estimate of HKD 42.50 for no-moat Country Garden Services, or CGS. While the company reported subdued earnings for 2022, they were in line with its profit warning. We think the worst is behind the company, and most of the short-run negatives have been reflected in its current share price. Looking forward, gross margin is set to rebound under resuming operating leverage of property management service and community value-added service, or VAS. Also, we view the goodwill impairment and pandemic-related costs as nonrecurring, which will help double the earnings per share in 2023. While heightened competition moderates our revenue growth outlook, CGS will likely maintain solid profitability given its asset-light business model and effective cost control. Our fair value estimate suggests a 2023 price/earnings ratio of 24.1 times, close to the low end of 20-50 times in 2019-21. In addition, investors welcomed the special dividend of CNY 0.23 per share, which drove up the payout ratio to over 60%. We think CGS will leverage ample cash at hand to maintain payout and seek expansion opportunities.

Country Garden Services, or CGS, a leading property management services company in China was spun off into its own listing in Hong Kong by sister company, Country Garden Holdings, or CGH, in 2018. Established as the PMS business arm of CGH since 1992, CGH’s project completions have fed CGS’ robust expansion, with CGH itself going through its own strong growth.

We lower our fair value estimate of no-moat Country Garden Services, or CGS, to HKD 42.50 from HKD 61.00, as the company’s profit warning indicates impairments and COVID-19 costs will hurt 2022 earnings, while the demand for value-added services, or VAS, has been weak. We have also raised our weighted average cost of capital to 10.4% from 8.8% on a higher market risk premium. CGS expects pretax profit and net profit to decline by around 34%-40% and 51%-57% year on year, respectively. We estimate the impairment charge, which is triggered by a weaker outlook for acquired businesses, to be around CNY 2.1 billion for 2022. Excluding this, CGS' core net profit is still down around 25% in 2022, with operating margin likely sliding to 13.9% from 19.9% in 2021—and lower than our original estimate of 17%. However, we view the bulk of the uptick in expense and the impairment to be one-off items, and expect earnings to rebound in 2023, but we do factor in a slower recovery in demand for VAS. Our fair value estimate reflects a gradual recovery in the sector with China’s policy shift to a progrowth stance. Market reaction to the news is negative, with CGS shares down almost 6% as of midday in Hong Kong trade, but we think most of the negatives are reflected in the current share price level. For investors looking ahead the next six months, we anticipate a much improved second-half 2023 for CGS, especially given the lower bar set for 2022.

Country Garden Services, or CGS, a leading property management services, or PMS, company in China was spun off into its own listing in Hong Kong by sister company, Country Garden Holdings, or CGH, in 2018. Established as the PMS business arm of CGH since 1992, CGH’s project completions have fed CGS’ robust expansion, with CGH itself going through its own strong growth.

No-moat Country Garden Services, or CGS’, first-half results were below our expectations on gross margin miss. Notably, the core property management services were dragged by the effects of mergers and acquisitions, and nonproperty owners value-added services, or NPVAS, saw a shift to lower-margin services. Despite the margin miss, significant top-line growth from the increased scale of the company’s operations more than doubled core property management services revenue and overall revenue by 73.5% year on year, and in turn core net earnings for the period rose by 30.5% year on year. Nonetheless, we reduce our fair value estimate to HKD 61 from HKD 73 per share, after lowering gross margin by 2.3 percentage points to 4.1 percentage points during the forecast period and adjusting for a higher share base. With the lower gross margin assumption, we also lowered our net earnings projections in 2022 and 2023 by 19% and 17%, respectively. CGS' share price has been sold down significantly, in contrast to its resilient operating performance. This is on market concerns of negative contagion from a related developer under challenging market conditions as a private developer with significant lower-tier market exposure. However, given the related developer’s recent funding guaranteed by the government—validating it as one of the stronger players in the market to be earmarked for policy support—we view the market concerns and selldown as overdone and the stock as very undervalued.

Listed in Hong Kong on June 2018, Country Garden Services, or CGS, listed as a spinoff via introduction by sister developer Country Garden Holdings, or CGH, at a 1-for-8.7 distribution ratio. CGS is a leading PMS player in China, backed by major developer CGH, with national coverage. Established as the PMS business of CGH since 1992, CGH’s project completions have contributed to CGS’ strong growth, with CGH having gone through a strong growth phase. This is with CGH’s support as one of the largest property developers in China.

No-moat Country Garden Services, or CGS’, full year 2021 results saw a margin disappointment. Gross margin decreased by 3.3 percentage points to 30.7% compared to a year before, mainly due to the higher percentage contribution of city services, which have a relatively low gross profit margin, and absence of exemption and reduction of social security contributions attributed to the pandemic. However, in our view, that did not derail the positives from the strong year-on-year revenue and net earnings growth at 85% and 50% respectively. Final dividend of CNY 0.2995 per share also rose 36.9% year on year on the back of higher profits. We adjust our earnings estimates with gross margins lowered and accordingly revise our fair value estimate to HKD 73 from HKD 85 per share, but maintain our view that despite heavy sector headwinds, CGS should deliver strong earnings this year. This is given the visibility of the growth in the property management services segment with incremental growth from mergers and acquisitions consolidation. Gross margins may also see gradual improvement as the acquired companies experience better profitability after consolidation.

Listed in Hong Kong on June 2018, Country Garden Services, or CGS, listed as a spinoff via introduction by sister developer Country Garden Holdings, or CGH, at a 1-for-8.7 distribution ratio. CGS is a leading PMS player in China, backed by major developer CGH, with national coverage. Established as the PMS business of CGH since 1992, CGH’s project completions have contributed to CGS’ strong growth, with CGH having gone through a strong growth phase. This is with CGH’s support as one of the largest property developers in China.

Listed in Hong Kong on June 2018, Country Garden Services, or CGS, listed as a spin-off via introduction by sister developer Country Garden Holdings, or CGH, at a 1-for-8.7 distribution ratio. CGS is a leading PMS player in China, backed by major developer CGH, with national coverage. Established as the PMS business of CGH since 1992, CGH’s project completions have contributed to CGS’ strong growth, with CGH having gone through a strong growth phase in terms of contracted sales at a CAGR of 30% to CNY 62 billion in 2019 and delivering 114 million sqm of projects from 2016-19. With CGS’s support as one of the largest property developers in China, CGS’ GUM experienced strong CAGR of 41% during the same period, and by 2019 CGS’ coverage spanned total contracted gross floor area, or GFA, of 685 million sqm and GUM of 279 million sqm across 350 cities and 2,405 properties.

We continue to like Country Garden Services, or CGS as the preferred pick among China property management companies, or PMCs, amid the backdrop of a weak physical market that may cast doubt on the gross floor area under management, or GUM, growth in the sector. Also, there is renewed market fear of heightened risk for PMCs being viewed as financing vehicles for the developers, which adds to the share price pressure on the listed PMCs. We think these concerns for CGS as overdone, which provides a decent entry point for the shares at the current level and the shares are undervalued. The company reiterates GFA deliveries progress from its sister developer Country Garden Holdings, or CGH, for the next two years remain intact, and the company’s recent commitment to steer away from significant related party transactions with the sister developer as well as a moratorium on further share placement and controlling shareholder share sales should bring some comfort over investors' main concerns that are shrouding the sector currently. While we raise our earnings estimates for 2022 and 2023 by 10% and 7% respectively, after incorporating the contributions from recent mergers and acquisitions, we reduce our fair value estimate to HKD 85 from HKD 88 per share after lowering the incremental GUM per year (excluding M&As) to about 100 million square meters per-year run-rate. Despite the company’s sector leading M&A progress amid the consolidation environment, we believe M&A deals are highly competitive in the sector and hence our no moat rating is unchanged. Nonetheless, while the operations of PMCs including CGS are stable, the company’s share price performance is susceptible to its sister developer’s updates, which may be a risk to watch for in terms of near-term volatility for the stock.