New services to drive further revenue growth
? After key M&As in FY21F, we believe CGS’s GFA growth will slow down from FY22F onwards. This will lead to slower growth in PM services in FY23F.
? Community VAS, city services and commercial operational services will become CGS’s revenue growth drivers in FY22-23F, in our view.
? Even after CB redemption, we expect CGS to hold some Rmb13bn net cash balance at end-FY22F to support its ongoing expansion.
? Reiterate Add, with a lower TP of HK$68.70 (0.9x PEG). CGS is still our preferred name among large-cap China property managers.
Rapid portfolio expansion in FY21F; slower GFA growth afterwards
Country Garden Services (CGS) spent c.Rmb21bn to acquire three large property management (PM) portfolios in FY21F — namely Languang Justbon, R&F Property Services and Link Joy Holdings (from Colour Life) — leading to an expansion of over 280m sq m of managed GFA from third parties (3P) in FY21F. Including the new managed GFA from sister company CGH (2007 HK, Hold) and other 3P contracts, we estimate its managed GFA at end-FY21F at close to 800m sq m (end-FY20: 377m sq m). Yet, given worsened market sentiments for raising cash through equity or CB, we think sizeable M&As would be unlikely in FY22F, leading to slower inorganic growth ahead.
Non-PM services to become revenue growth drivers in FY23F
CGH’s contracted sales GFA declined by 1% yoy to 66.4m sq m in FY21, which reflected a market-wide weakening of property sales in China in 2H21. This would lead to CGS’s flattish growth in managed GFA from CGH, in our view. We see a fast decline in growth rate of revenue from PM services in FY23F, on the back of fewer M&As and slow growth in CGH’s GFA delivery starting from FY22F. Community value-added services (VAS) for acquired portfolios and newly delivered GFA by CGH, as well as city services and commercial operational services, will be key drivers of its revenue growth in FY22-23F.
Sufficient liquidity to support CB redemption in Jun 2022
In Jun 2022, CGS will fully redeem out of its own cash resource the HK$5bn CB issued in May 2021. Management claims that CGS’s operating cash flow and upcoming redemption of wealth management products will support the CB redemption, and therefore does not foresee the need for refinancing it. We estimate that after CB redemption, its end-FY22F net cash balance would still be some Rmb13bn.
Reiterate Add with a lower TP of HK$68.70
We raise FY21-23F EPS by 5-12% to factor in: i) EPS-accretive M&As (i.e. R&F Property Services and Link Joy Holdings), which we have not factored in since our last model update, and ii) revised revenue projections for city services and commercial operational services. However, as we roll over our EPS CAGR to FY21-24F, the new EPS CAGR is lowered to 34% (39% previously). We lower our TP for CGS to HK$68.70, still based on 0.9x PEG (equivalent FY22F P/E: 30.4x). Reiterate Add. A key downside risk is valuedestructive M&As, while successful expansion in new businesses is a potential re-rating catalyst.