China Property Management Sector: Next to shine in midst of sentiment recovery
- Stands to benefit from recovering sentiment in the China property sector
- PM names are good proxies for property market recovery due to their more visible earnings outlooks and hard-hit valuations
- Expects quality POEs to post stronger recovery and regain valuation premium positions vs SOEs
- Top picks: Country Garden Services (6098 HK), CIFI Ever Sunshine (1995 HK)
Stands to benefit from recovering sentiment in the property side. The PM sector has long been suppressed by the property sector’s turbulence, with it posting a meaningful correlation of 0.77 with the development sector since 2H21. The likely bottoming of the property sector (see China Property Sector: Brace for a round of recovery for details) should reflect favourably on the PM sector. On another note, with only a handful of survivors in the property sector after the turbulence of the past year, the choices available to investors in the development space have become limited. This should divert investor interest towards the PM sector.
A good proxy for the recovery ahead. With the sector’s evidently more resilient and visible earnings vs that of developers (most recognition pace, booking margins, and thus earnings outlook remains uncertain), PM names are fundamentally better poised for investors as proxies to ride on the physical market recovery ahead. Previous concerns about possible major shareholder stake disposals, potential impairment from related party receivables, and their growth outlook upon the sharp moderation in the physical market should have been in the price, given the months of sector underperformance and near-historical low valuations.
Quality POEs to post a better run. SOEs have reversed their valuation discount vs quality POEs (comprising CGS, CIFI Ever Sunshine and GTS) since 2022 as subdued market sentiment have eventually spilled to quality POE developers. With the property sector hitting its bottom and investors regaining their calm, we believe quality POEs who are still better poised for growth (both in terms of overall execution and M&A potential) and are cheap in valuation will likely receive more investor interest, in our view. Among individual names, those that are still in possession of solid growth prospects and have financially sound developer backgrounds will likely fare better in this round of recovery. Our top picks in this regard are Country Garden Services (6098 HK) and CIFI Ever Sunshine (1995 HK).