Uncertainties ahead
Investment Thesis
Rising uncertainty on its ability to achieve its five-year growth target. GTS secured c.128m sm of contracted GFA (vs target of 150m sm) or c.Rmb4.5bn of annualized contracted sum (vs Rmb5bn target) in 2021, due to delays from the resurgence of COVID-19 cases in Nov-Dec 21 and marked a miss to the first of their ambitious 5-year growth plan. Meanwhile, we believe GFA conversion will likely fall short of expectations as well, with consultancy services to moderate given the physical market downturn. While GTS believes such setbacks are temporary and has maintained its growth targets for now, we see a possibility that the company may have to tune down its expectations in the future.
Major adjustments to senior management team hints at a potential change in corporate culture and strategy. After the change in CEO and the retirement of its ex-Chairlady LI Hairong, GTS appointed a CFO and COO in Jan-22; both are from China Resources group. This marks a deviation from its historical practice of promoting candidates internally for senior positions. We believe such changes and appointments in the management team will likely spark meaningful changes in GTS’s corporate culture and potentially on its growth strategy as well. Dust from these ends will likely take time to settle and potential impact will have to be carefully monitored.
Valuation:
Our new TP is based on 22.7x FY22F EPS, which is on par to the company’s average 1-year forward PE in 2H21.
Where we differ:
Ability to balance service quality and growth yet to be proven. We believe GTS’s ambitious five-year growth plan may pose challenges to the maintenance of its overall service quality, which has been
the company’s key competitive edge vs peers. We are less optimistic on the company’s ability to strike a proper balance between the two before more evidence to suggest otherwise.
Key Risks to Our View:
Inability to maintain service quality and reputation during their five-year plan; inability to maintain profit margins; operational risks in existing VAS businesses; failure to adequately control labour costs.