Mild business impact from lockdowns
? Management explained that its third-party GFA expansion progress has been disrupted by lockdowns in Shanghai.
? It however thinks a higher overall gross profit margin is possible in 1H22F given the lower cost of mall management during the lockdowns.
? Meanwhile, management reiterated its five-year M&A target.
? Reiterate Add and target price of HK$7.8. PCM’s parent’s inability to repay its US$ bond due in Jul 22 on time is one of the key risks to our call.
Business mildly disrupted by lockdowns
? In our virtual property conference, management of Powerlong Commercial (PCM) explained that out of the 88 malls it is managing under commercial operational services, retail sales of some 10-20 malls were more affected than others by pandemic-related lockdown measures in recent months.
? Management has started the pre-leasing work for Taizhou Jiaojiang Powerlong City, the only mall carrying “Powerlong City” brand that is going to be added to PCM’s management portfolio in FY22F.
? Progress for third-party (3P) expansion has been slow due to lockdowns in Shanghai. Management however still targets to close one or two 3P bidding deals by end-Jun 22.
Margin expansion possible in 1H22F
? In contrast to its peers that have been suffering from margin compression in 1H22F in property management (PM) services, management expects a possible expansion in overall gross profit margin (GPM) in 1H22F, given that its management fee collection from retail malls has remained largely unchanged, while mall management costs have decreased due to lockdowns in some cities.
? Management does not expect concessions on commercial management fees even though there may be rent and tax reliefs provided to tenants and approved by the government.
Reiterates its five-year M&A growth target
? PCM has not changed its five-year M&A growth target (2.5m sq m commercial GFA expansion). Even though this target is equivalent to 0.5m sq m growth per year on average, management explained that it foresees growth exceeding 0.5m sq m in some years, making up for slower growth in other years.
? PCM prefers asset-light targets (which means sub-leasing management is unlikely, in our view) from small developers.
? Management does not expect PCM to acquire other assets from parent Powerlong Real Estate (1238 HK, NR) after an office transaction with its parent was cancelled.
Reiterate Add with a TP of HK$7.8
? Management believes that PCM’s annual payout ratio of 50% is sufficiently high to reward its shareholders, while still retaining earnings for business expansion.
? We reiterate our Add call for PCM with a TP of HK$7.8, still based on a 0.3x PEG (6.9x FY22F P/E). We think its 23% EPS CAGR over FY21-24F is achievable, given the stable growth and high-margin nature of its commercial-focused PM portfolio.
? Key downside risks include its parent’s inability to repay its debt (e.g. US$200m notes due in Jul 22) on time, which could hamper PCM’s growth in both commercial and residential PM.