The undisputed sector leader
Investment Thesis
A key beneficiary of an increasingly active M&A market. CGS has c.Rmb14.5bn of net cash (excl. payable convertible bonds, assuming recent acquisitions have been fully paid up) for potential M&A opportunities ahead. This would place it first across the sector in terms of cash resources. While we expect CGS will likely put more focus on the consolidation of recently acquired companies, the company is still proactive in the M&A space and is up for small and mid-sized acquisition opportunities. Further M&As would offer upside to our current earnings estimates and further enhance the company’s already solid growth prospects.
Largely unaffected by the property sector downturn. Unlike most peers in the sector, CGS’s related developer Country Garden (2007 HK) was less affected by the liquidity crunch in the development sector since 2H21. Delivery pace should be largely intact, with a manageable slowdown in presales alongside the physical market. Impact from these fronts on CGS should be manageable and are fully covered by its recent M&As and solid progress in community VAS.
Valuation:
Our TP is based on a 35.8x FY22F EPS, which is the average 1-year forward PE for the company in 2H21.
Where we differ:
Poised to maintain its valuation outperformance borne by its highest combined rankings in terms of earnings growth visibility, earnings quality and growth potential among peers – the three key factors that explains the valuation discrepancy in the sector (refer to our report: Who is best poised to outperform? for detailed comparisons vs peers)
Key Risks to Our View:
Inability to secure sufficient M&A to offset EPS dilution; delayed deliveries from Country Garden (2007 HK); share disposal from controlling shareholder; faster than expected surge in labour cost.