Dragged by KWG Group’s liquidity issues
- We think that KWG Group’s liquidity issues should inevitably drag on KWG Living’s portfolio and profit growth in FY22-24F.
- Even with few or no M&A ahead, we however think KWGL could still deliver 13% EPS CAGR in FY21-24F and 30-35% payout ratio in FY22-24F.
- Reiterate Add with a lower TP of HK$2.3 (5.1x FY22F P/E). With Rmb1.2bn net cash, it trades at just 3.4x FY22F P/E based on our forecast.
Sister company’s lower property sales to drag on portfolio growth
KWG Living’s (KWGL) sister company KWG Group (KWGG) is facing increasing difficulty in repaying US$-denominated bonds due in Sep 22 (our report on KWGG here). We project a 45% yoy decline in KWGG’s FY22F contracted sales and slow recovery in subsequent years; the lower-than-expected GFA delivery from KWGG could drag on KWGL’s property management (PM) portfolio growth in FY22-24F.
Fewer M&A allow for better integration of acquired companies
In view of higher uncertainty in economic growth and the property market, we now expect KWGL to expand fairly conservatively, i.e. focus on third-party (3P) bidding (though its progress could be delayed by Covid-19 outbreak in short term) and acquire PM firms only on an opportunistic basis. In contrast with managed GFA growth of 165m sq m in FY21, we project increments of only 28m-36m sq m p.a. in FY22-24F. We think this may not necessarily be bad for KWGL, which can better focus on integration and cost control of companies acquired in FY21 (i.e., Cedar, Shenqin and Telijie).
GP margin for non-residential PM could be upheld
In view of slower M&A for both residential and non-residential GFA, as well as lower revenues from pre-sales activities, we cut FY21-24F revenue CAGR from 45% to 19%. As we assume minimal growth in public facilities portfolio, its GP margin for nonresidential properties segment could still be held at 37% in FY22-23F (FY21: 41%), on the back of GP contribution from commercial PM services and commercial operational services which bear lucrative GP margins.
Cash preservation supports a stable payout ratio
At end-FY21, KWGL has used up the portion of IPO proceeds designated for M&A and Rmb460m was left for system upgrades and enhancement in value-added services. In our view, its net cash position of Rmb1.2bn at end-FY21 is sufficient for its working capital, even if cash collection from KWGG or homeowners slows down a little. Hence, we believe that KWGL can maintain its dividend payout ratio at 30-35% in FY22-24F.
Reiterate Add with a lower TP of HK$2.3
We cut our FY22-24F EPS by 18-41% due to lower revenue growth assumptions (19% CAGR) with slower PM portfolio growth, as well as lower overall GP margin in FY22-24F (more details on page 2). Our new FY21-24F EPS CAGR is 13%. We cut TP to HK$2.30, now based on 5.1x FY22F P/E (previously 10.5x; refer to Fig. 2); we lift target PEG from 0.3x to 0.4x as we believe there is less risk of a lower EPS CAGR. Reiterate Add. A downside risk is worsening of KWGG’s liquidity and property sales.