- Another c.3-12% cut may be made on FY21-23F consensus earnings estimates
- …but the sector will, nonetheless, still be able to deliver a solid c.39% 3-year CAGR on average
- Downside risk on consensus should be in price; sector is attractive even as dividend plays with property sales-related income excluded
- Price volatility in 1H22 to offer entry points for quality names – CGS (6098 HK)
Solid growth prospects despite earnings cuts ahead. With existing uncertainty in the property sector, both property developers and managers have yet to provide an update on their growth guidance. The impact that property managers will face from the property sector’s struggle remains an unanswered question. Our analysis, incorporating the latest expectations on developers’ delivery pace, property managers’ M&A outlooks, actual presales, and land acquisition data, identified that there may be another 3-12% cut to be made on consensus FY21-23F earnings in 1H22 (detailed methodology and result on P.2-3). Having said that, the sector will still be able to post a solid c.39% 3-year earnings CAGR for names we track (vs. 48% previously).
Earnings downside in price. Having factored in our estimated earnings cuts, the sector is still traded at >1sd below its historical 1-year forward PE since 2018. Even if we are to look at the sector from an extreme angle as dividend plays, assuming 1) all property- related non-recurring income are excluded, 2) property managers to adhere to a 90% dividend payout, and 3) zero earnings growth from FY22 onwards, the sector will still be able to offer a fruitful unlevered FY22F dividend yield of c.6.2%, vs. a 6.3% levered FY22F distribution yield from HK-listed REITs.
Price volatility in 1H22 to offer entry opportunities for quality names. Valuation of the PM sector should have seen its worst with weak sentiment spilled over from the property side started to show signs of stabilisation, and investors’ attention will gradually return to this sector with their eyes back on property managers’ decent fundamentals and growth outlook. Price volatility in the sector will likely persist in 1H22, as the market adjusts earnings estimates in the likely absence of clear growth guidance. We recommend investors to watch for entry opportunities for quality names. Our sector top pick remains as Country Garden Services (6098 HK) for it having the necessary qualities to maintain its growth and valuation outperformance.