• Share price retreated 43% from peak
• M&A activities should reduce concentration risks with Country Garden Holdings
• Lower fair value estimate of HKD64.03
Seeking more independence from parent group – Country Garden Services Holdings’ (CGS; stock code: 6098 HK) share price has corrected 43% from its peak in Jun 2021, although YTD its share price has recovered 4% (as at 21 Jan 2022 close). Besides the de-rating seen in the property management services sector due to a slowing physical real estate market, we believe the weakness in CGS’ share price has also been driven by concerns over its parent company Country Garden Holdings Group’s (CGH) liquidity position and whether CGS would be used as a financing tool for CGH. CGS recently published an announcement on the Hong Kong Stock Exchange on 14 Dec 2021, highlighting that it will not carry out any material asset disposals or acquisitions with consideration above RMB200m with CGH within six months of the announcement. However, any continuing connected transactions that have been approved by the board and/or at the general meeting of CGS will continue as usual. CGS also committed that it will not conduct any placement of new shares in the open market within six months of the announcement, and said that its operations and business decision making are fully independent from its parent-subsidiary relationship with the CGH, and it has sufficient internal resources to fund inorganic growth opportunities ahead.
Active on the M&A front, which would reduce its concentration on Country Garden Holdings – CGS has been very active on the M&A front to boost its scale. This has been supported by its strong balance sheet and large size, although it did carry out two private placement exercises in May and Nov 2021 to raise combined gross proceeds of HKD18.5b. CGS completed the acquisition of Justbon Services on 30 Jun 2021, and announced in Sep 2021 the proposed acquisitions of the property management service provider arm of R&F Property and core assets of Colour Life Services, a leading property management and community services operator in the PRC. With these acquisitions, CGS’ exposure to CGH would be reduced and its income streams more diversified.
Lower our fair value estimate to HKD64.03 – We switch our valuation methodology from a price-to-earnings-to-growth (PEG) multiple to a price-to-earnings (P/E) target multiple. We ascribe an initial P/E target peg of 29.8x, which is a quarter of a standard deviation below its historical average forward P/E since listing, and then apply a slight ESG valuation premium, such that our adjusted target P/E peg settles at 30.6x. Applying this to our FY22F fully diluted EPS, we derive a lower fair value estimate of HKD64.03 (previously HKD85.37).
ESG Updates
CGS has done a number of large-scale acquisitions, the subsequent restructuring and integration may
lead to exposure to management risks. CGS offers strong compensation schemes such as share options to mitigate these risks. CGS also appears to have a comprehensive occupational safety strategy and thus scores well in the ‘Health & Safety’ category. However, CGS’ board lacks an independent director majority, and several family members of the controlling shareholder and company executives serve as board members. CGS also derives a substantial portion of its revenue from services provided to its parent Country Garden Holdings, thus making it highly dependent on Country Garden’s expansion for its success. BUY. (Research Team)