To see slower M&A, VAS growth

■ Sunac Services achieved its GFA targets for FY21F; third-party (3P) contracts accounted for two-thirds of GFA increment during the year.
■ After its acquisition for First Services fell apart, management is highly cautious of the quality of related-party transactions of acquirees.
■ Management also stressed that its receivables collection from parent Sunac remains normal. Reiterate Add, with a lower TP of HK$9.8.

Management: GFA targets for FY21F achieved

Today we hosted a conference call with investors, and the management of Sunac Services participated. Management said it achieved its portfolio targets of 210m sq m/360m sq m for managed GFA/contracted GFA at end-FY21F, thanks to its active expansion in 3P contracts throughout the year, as well as M&As secured in 1H21. GFA from 3P and M&A combined accounted for two-thirds of its total increment in FY21F.

Highly cautious on M&As after terminating the First Service deal

Yesterday, Sunac Services terminated its offer to acquire First Service (2107 HK, NR), citing that the seller refused to accept a lower offer price on the basis of liquidity issues of sister company Modern Land (1107 HK, NR). Management explained that it identified at least six more potential targets in 2H21. Despite lower valuations of potential targets compared to a year ago in both primary and secondary markets, management is now highly cautious of expansion via M&As, highlighting that risks for M&As could come from the target’s high proportions of revenue and receivables from related-party transactions, which could render valuations by P/E multiples delusive.

No receivables issues involving Sunac

Management does not believe Sunac would further dispose of its stake in Sunac Services after it did once in early-Nov 2021. Sunac Services’ receivables collection from Sunac and other customers is currently as per normal, and management does not foresee any significant deterioration. Nevertheless, because of weaker property sales activities, its value-added services (VAS) to non-property owners will likely face pressures on revenue and gross margins. Management stressed that Sunac Services will continue to focus on 3P management contract expansion and community VAS.

Reiterate Add, with a lower TP and PEG multiple

Though management has yet to provide new guidance for FY22-23F, we cut our FY21- 23F EPS by 2-15% to primarily factor in: i) lower GFA growth from M&As; ii) lower revenue and gross margins from VAS to non-property owner segment; and iii) higher impairment provision for receivables due to weaker operating environment of developers. Our new EPS CAGR for valuation is lowered to 31%. Based on a lower PEG multiple of 0.5x, we cut our TP for Sunac Services to HK$9.8. We reiterate our Add call due to its attractive valuation (10.8x FY22F P/E). Key downside risks: worsening liquidity of its parent Sunac and higher-than-expected impairment of receivables; re-rating catalysts: stronger-than-expected revenue growth from VAS and recovery of Sunac’s liquidity.