Concerns on related party risk overplayed
- Concerns over possible linkages with related developer overplayed
- Impact from related developer’s liquidity struggle and COVID-19 resurgence should be manageable
- Cut FY22/23F earnings by 12%/6% to reflect affected growth prospect from COVID-19 resurgence and lingering property sector turbulence
- Maintain BUY with TP trimmed to HK$33.19/sh
Investment Thesis
Selloffs led by concerns spilled from sister developer’s liquidity risk have been overdone.
We believe concerns on CGS’s possible provision of guarantees/pledges for certain of Country Garden (CG, 2007 HK)’s borrowing is overplayed. CGS’s financials were audited and signed off by PwC, the same auditor that exposed the cash pledge arrangement between Evergrande (3333 HK) and Evergrande Services (6666 HK). We take the view that CGS would have faced the same level of scrutiny, and similar arrangements would have been made known to the public, if they existed. The recent heavy selloffs that were made upon concerns on this front seem unwarranted and overdone, in our view.
P&L impact from related developer’s current operational struggle and COVID-19 lockdowns should be manageable.
We believe CGS can still report >20% core earnings growth in 1H22 and maintain 20% growth for the full year. Shortfalls from non-property owner VAS (stemming from CG’s relatively weak presales due to the
ongoing property sector turbulence), the delayed delivery pace, and slowdown in Community VAS (dragged by COVID-19 lockdowns) are to be offset by full-year earnings contributions from M&As.
Valuation:
Our TP is based on a three-stage DCF model, which implies a 23.6x/17.2x FY22F/23F PE.
Where we differ:
CGS more than capable of operating independently. Businesses derived directly from CG represented c.8% of CGS’s FY21 revenue and the portion is expected to fall. The portion of Incremental contracted GFA from third parties has largely caught up with that of CG in 2021 and will likely exceed the latter’s portion from FY22 onwards. This indicates the often neglected fact that CGS is fairly established and can grow independently in the absence of support from CG.
Key Risks to Our View:
Related developer Country Garden (2007 HK) fails to remain solvent, stronger-than-expected delay in project delivery, and share disposal from controlling shareholder.
