Over 100% upside potential in 12 months
? KWG Living has among the best M&A execution and has expanded its portfolio by 10x in 14 months, which should secure its growth over FY22-23F.
? Despite our conservative assumptions, we forecast 40% EPS CAGR over FY21-24F.
? Reiterate Add with a lower TP of HK$7.40, which suggests a potential upside of more than 100% in 12 months. It is our high conviction stock pick.
Another decent M&A last week
KWG Living (3913 HK) on 10 Jan 2022 announced another decent M&A to enter the city services segment. It spent Rmb165m to acquire a 50% stake in a city services company based in Foshan – representing about 10x FY22F P/E. The seller guarantees not less than 10% net profit growth over FY22-24F. Including a 5% stake it owned previously, KWG Living will own a 55% stake in the target company and management expects to consolidate the target company results in FY22F. We assess that the latest M&A should help it enter city services – a high growth segment supported by increasing outsourcing
of city property management by the local governments.
Strong M&A execution to secure profit growth for FY22/23F
Including the latest M&A, KWG Living has concluded four key M&As since its IPO in Dec 2020 and expanded its managed GFA by almost 10x to 210m sq m currently from 22m sq m in 2019. This has demonstrated its execution and secured its net profit growth over FY22-23F, in our view. We project its managed GFA to further expand to about 260m sq m in FY22F and 320m sq m in FY23F, as we assume only some GFA of 20m sq m from M&As for the rest of FY22F and FY23F (Please refer to Fig 1 for more details).
We estimate EPS CAGR of 40% over FY21-24F
Given the slowdown in the property market in China, we lower our managed GFA assumptions and trim our EPS by 4-12% over FY21-23F. Meanwhile, we expect its EPS to increase by 25% in FY24F, translating into an EPS CAGR of c.40% over FY21-24F. To see much lower reliance on sister company KWG Group ahead
KWG Living generated some 40% of its revenue and receivables from its sister company
KWG Group in 1H21, which is high compared with its peers. However, we expect the ratio to come down markedly to about 20% for FY21F and further fall to 15% in FY22F, after the consolidation of key M&As in FY21 and FY22F. Meanwhile, we assess that liquidity risk for KWG Group should be manageable.
Could buy shares for its management stock scheme
Given its very low valuation of 4x FY22F P/E, we think the company could purchase shares in the secondary market for its management stock scheme, which could account for about 10% of its outstanding shares with 10 years of vested period.
Reiterate Add call and our high conviction pick
We cut our TP by 55% to HK$7.40 – suggesting over 150% potential upside – as we roll over our PEG-based TP to FY21-24F EPS CAGR and apply a lower PEG benchmark due to the slowdown in the property market