Higher parent-related impairment likely
- Sunac Services’ Rmb751m net loss in 1H22 was due to parent-related impairment loss. We think the impairment will drag its FY22-23F EPS.
- Its managed GFA growth is slowing down, with negative net delivery by parent in 1H22. Its weakening brand could also slow its 3P expansion.
- We downgrade Sunac Services to Reduce from Hold, with a lower TP of HK$1.56 (5x FY23F P/E).
Net loss in 1H22 due to parent-related impairments
Sunac Services reported a net loss of Rmb751m for 1H22 (vs. our estimate of Rmb573m
profit), after recognising an impairment loss of Rmb1.8bn for receivables from related
parties (e.g. Sunac), accounting for 29% of its total gross receivables as at end-Jun 22.
Excluding the impairment, its net profit would have been Rmb561m in 1H22 (-11% yoy),
due to a decrease in profit from value-added services (VAS) to non-property owners.
Overall gross profit margin (GPM) declined by 3.4% pts yoy due to a contraction in VAS
to non-property owners and community VAS.
Portfolio expansion slowing down quickly
Although its managed GFA increased by 20m sq m in 1H22, we saw a decline in
managed GFA of 0.8m sq m from Sunac’s subsidiaries. In contrast, more than 65% of the
incremental GFA was sourced from projects developed by third parties (3P). Its slow GFA
expansion due to its weakening brand, coupled with parent’s financial stress, would lead
to only a 10-19% p.a. growth in its managed GFA in FY22-24F and a 10-27% p.a. growth
in its revenue from property management (PM) services, based on our estimates.
More parent-related provisions very likely
Its Rmb1.8bn impairment provisions for receivables from its parent in 1H22 accounted for
only c.50% of its total gross trade receivables from parent (Rmb3.7bn) as at end-Jun 22.
As parent’s liquidity problems are unlikely to be solved in the next 12 months and as
economic growth appears to be sluggish, we expect higher impairment provisions for
receivables from Sunac as well as 3P in FY22-23F, which would lead to a drag on its
Downgrade to Reduce with a lower TP of HK$1.56
We cut our FY22-24F EPS forecasts by 145%/55%/58%, with revised assumptions of
slower managed GFA growth and higher impairment losses. We change our valuation
methodology from PEG-based to P/E-based for Sunac Services as sustainable EPS
growth is no longer applicable; and as we peg its FY23F EPS to 5x P/E (applicable to
mid-cap PM companies we cover), we cut our TP to HK$1.56 and downgrade the stock
to Reduce from Hold. De-rating catalysts: higher-than-expected impairment losses and
unsuccessful renewal of existing PM contracts. More supportive policies for China’s
property market, which could help solve Sunac’s liquidity problems, is a key upside risk
for Sunac Services.