Slower inorganic growth; attractive valuation
? Although Shimao Services achieved its key GFA growth targets in FY21, we think its expansion will slow down in FY22-23F without sizeable M&As.
? Receivables from Shimao Group accounted for less than 20% of its total receivables as of end-Jun 21, in our estimate.
? The proportion of revenue from Shimao Group should decrease further on the back of increased contribution from acquired companies and new VAS.
? Reiterate Add, with a lower TP of HK$8.3 (0.4x PEG).
Achieved key operating targets in FY21
Shimao Services was able to achieve its FY21 gross floor area (GFA) portfolio targets, with ~230m sq m managed GFA and ~300m sq m contracted GFA. A year ago, it had set aggressive GFA expansion targets for FY22F — 70% yoy growth in contracted GFA. Given that Shimao Services now faces more challenges than before in pursuing M&As, we believe this guidance would be lowered.
Slower GFA growth ahead without sizeable M&As
Given that the investment community is concerned over its related-party transactions (RPT) with Shanghai Shimao (600823 CH, NR), we think Shimao Services might eventually withdraw its offer to purchase Shanghai Shimao’s commercial property management business. Instead, it will rely on third-party (3P) contracts to grow its portfolio, in our view. In the absence of a sizeable M&A, we expect its contracted GFA to grow by a CAGR of just 20% over FY21-23F.
Revenue share from third parties will continue to increase
Management gave no hint on whether its provisions for receivables from Shimao Group and other developers would increase in FY21. Based on our estimate, Shimao Group accounted for less than 20% of Shimao Services’ receivables as of end-Jun 21. We expect the proportion of revenue from Shimao Group will stay low, with: i) less than 15% of its new managed GFA from Shimao Group in FY21-23F, and ii) the revenue share of value-added services (VAS) to non-property owners declining from 14% in FY20 to just
6% in FY23F, based on our forecast. We expect the companies that Shimao Services had acquired in FY19-20 (e.g. those engaging in city services and campus management), the new community VAS, and the 3P contracts it has signed or will secure in FY22-23F to continue to take the share of Shimao Services’ revenue from Shimao Group.
Reiterate Add, with a lower TP and PEG multiple
We cut FY21-23F EPS by 5-26% to factor in slower growth in managed GFA and lower projections for revenue from VAS to non-property owners. Our TP declines to HK$8.3, now based on 2022F P/E of 10.6x (vs. 28x previously) to reflect cuts in our 3-year EPS CAGR forecast and PEG multiple. Our Add call remains, in view of its attractive valuation (6.5x 2022F P/E). Key downside risks: worsening of Shimao Group’s liquidity and higher-than-expected impairment of receivables. Re-rating catalysts: stronger-than-expected revenue growth from GFA and VAS, and improvement of Shimao Group’s liquidity.