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Outperform (maintained) · Company profile by segment Segment breakdown and key revenue driver of...
Transcript of Outperform (maintained) · Company profile by segment Segment breakdown and key revenue driver of...
CHINA PROPERTY | 2 JUNE 2017
Analyst certifications and other important disclosures on last page 1
Greentown Service Group | 2869 HK The surest thing
We lift our FY17F EPS estimate by 8.1%
Additional upside from venture into education
Valuation undemanding, reiterate Outperform rating
and lift target price
26.4% EPS CAGR in FY16-FY19F. Greentown Service (GTS) derives
its earnings from three sub-segments - basic property management, consulting services, and value added services. Based on industry analysis and a by-segment company analysis, we estimate gross profit from the three sub-segments to grow 28.1% YoY, 11.1% YoY, and 28.7% YoY, respectively, in FY17F. In addition, we expect GTS to better manage its costs and look for SG&A expense as a percent of gross profit to decline from 39.8% in FY16 to 36.5% in FY17F. Based on these promising estimates, we lift our FY17F core EPS estimate by 8.1% to RMB0.14 (from RMB0.13) and look for a 26.4% EPS CAGR in FY16-FY19F, up from 23.3% previously.
Education segment to pay off in 2019F. GTS ventured into the education market in late 2016 by establishing daycare centers in the communities it manages. The plan is to open 100 day-care centers with an average annual revenue goal of RMB5m per center by FY19F. While GTS’ existing daycare centers are in high demand and have exceeded the RMB5m target, we have not included this new venture into our earnings estimates due to its short track record. Assuming GTS could roll out its schools according to plan and assuming an average net margin of 20%, we believe inclusion of the education segment would increase GTS’s FY19F core EPS by approximately 14%.
Valuation undemanding; lift target price and maintain Outperform. We continue to like GTS for its asset-light business model and high-end focus. Our positive stance was bolstered after our attendance of GTS’ reverse roadshow in Hangzhou on 29 May 2017, during which new growth drivers were unveiled. Based on the company’s highly visible growth potential and strong balance sheet, we consider the current valuation of 24.0x FY17F P/E (17.9x ex-cash) undemanding as we have not included GTS’ newest venture into our earnings estimates. After fine-tuning our estimates we increase our FY17F core net profit and EPS estimate by 8.1% and lift our target price from HK$4.32 to HK$5.11 and reiterate our Outperform rating on the company. The key risk to our price target is market risk.
Outperform (maintained)
Current price: Target: HK$3.74 HK$5.11
(as at 2 Jun 2017) (up from HK$4.32)
Trading data
52-week range HK$1.99 – 3.80
Market capital (ordinary)(m) HK$10,390/US$1,132
Shares outstanding (m) 2,778
Free float (%) 36.6
3M average daily T/O (m share) 9.7
3M average daily T/O (US$ m) 3.8
Expected return (%) – 12 month 36.8
Source: Bloomberg, CCBIS estimates
Share price vs HSCEI
Source: Bloomberg, CCBIS
Forecast and valuation
Year to 31 Dec 2015 2016 2017F 2018F 2019F
Revenue (RMB m) 2,919 3,722 4,697 5,624 7,082
YoY (%) 32.4 27.5 26.2 19.7 25.9
Core Net profit (RMB m) 198 286 383 456 577
YoY (%) 32.5 44.5 34.1 19.1 26.5
Core EPS (RMB ) 0.10 0.10 0.14 0.16 0.21
YoY (%) 32.5 4.0 34.1 19.1 26.5
Core P/E (x) 31.7 32.6 24.0 20.2 15.9
Core ex-cash P/E (x) 28.1 23.1 17.9 14.2 10.2
Core DPS (RMB ) 0.12 0.04 0.05 0.06 0.07
Dividend yield (%) 3.7 1.1 1.5 1.7 2.2
ROAE (%) 108.0 30.1 20.4 21.1 23.0
Net debt/equity (%) -501.5 -131.5 -137.7 -140.4 -145.3
Company data, CCBIS estimates for FY17F-FY19F
Stock performance
Performance over 1M 3M 12M
Absolute 25.4 43.7 N/A
Relative (%) to HSCEI 20.6 39.6 N/A
Source: Bloomberg, CCBIS
Frank Miao, CFA
(852) 3911 8246
1.0
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Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Jun-17
GTS HSCEI
GREENTOWN SERVICE (2869 HK) | 2 June 2017
CCBI SECURITIES 2
Company profile by segment
Segment breakdown and key revenue driver of each segment
Source: Company data, CCBIS estimates
26.4% EPS CAGR in FY16-FY19F with high visibility
Basic property management: the cash cow
GTS’ property management segment entails providing a wide range of standard property
management services such as security, cleaning, gardening, and maintenance services
at a predetermined fee and charged to the residents and owners of managed properties
- often on a monthly or quarterly basis. As a property management contract would
typically have a term of one to three years and is generally irrevocable, revenue from
property management is recurrent and very low-risk. We consider this segment the cash
cow for property managers.
Key revenue growth drivers for the basic property management segment are (1) GFA
under management, and (2) the per sq.m fee charged to property owners. In our view,
both variables can be estimated with a relatively high degree of visibility.
105125
14616818.5
17.0
15.5
12
14
16
18
20
0
100
200
2016 2017F 2018F 2019F
GFA under management (m sq.m)
Growth (RHS, % YoY)
452 485 514 569
7.3 6.1 10.5
-
5.0
10.0
15.0
-
200
400
600
2016 2017F 2018F 2019F
# of consulting contracts
Growth (RHS, % YoY)
229,316
271,754
317,994
367,177 18.5
17.0
15.5
12.0
14.0
16.0
18.0
20.0
-
100,000
200,000
300,000
400,000
2016 2017F 2018F 2019F
# of households coveredGrowth (RHS, % YoY)
2.1
2.2 2.3
2.5
7.4
2.5
8.3
-
2.0
4.0
6.0
8.0
10.0
1.8
2.0
2.2
2.4
2.6
2016 2017F 2018F 2019F
Property management fee
Growth (RHS, % YoY)
1.37
1.42
1.36
1.40 3.5
(3.7)
2.5
(6.0)
(4.0)
(2.0)
-
2.0
4.0
1.32
1.34
1.36
1.38
1.40
1.42
2016 2017F 2018F 2019F
Average fee per contractGrowth (RHS, % YoY)
2.1 2.5
2.9 3.5
18.0 16.7
20.4
0
10
20
30
-
1.0
2.0
3.0
4.0
2016 2017F 2018F 2019F
Average annual spending per household
(Rmb 000)
Growth (RHS, % YoY)
Basic property management Consulting Services Community Services
2,620
286
3,334
367
3,999
440
618
219
686
244
701
249
484
210
677
271
924
370
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2016A Rev
2016A GP
2017F Rev
2017F GP
2018F Rev
2018F GP
Basic property management Consulting services Community services
Recurrent and low-
risk cash flow
GREENTOWN SERVICE (2869 HK) | 2 June 2017
CCBI SECURITIES 3
GFA under management: driven by completion
To a large extent, GFA under management growth is “supplied” by growth in GFA
completion, which is in turn driven by GFA sold. Due to strong GFA sold growth in 2016
and year-to-date 2017 we believe nationwide GFA completion growth will trend up in the
next six to 12 months. This is very positive for property managers overall.
Nationwide GFA sold and GFA completion Nationwide GFA sold and GFA completion growth trend
Source: NBS Source: NBS
Management fee: stable but low growth due to regulation
While the argument could be made that high-quality property management services
would enhance the value of the underlying properties and therefore have commercial
value, the industry still faces challenges in terms of pricing and profitability because basic
property management services are often considered “after-sales services” that
developers are obliged to provide. For instance, lifting prices for basic property
management services is often difficult and requires approval from regulators as well as
from property owners. Based on these factors, we expect basic property management
fees to increase at a gradual but stable rate over time. That said, it is also our belief that
increasing prices is easier for high-end managers like GTS because monthly property
management fees comprise a much smaller portion of both income and expenditure for
owners of high-end properties.
GTS well positioned to grow basic property management revenue
In 2016, GTS recorded basic property management revenue of RMB2.6b, up 25.3% YoY
and accounting for 70.4% of GTS’s total revenue. For FY17F-FY19F, we estimate revenue
from basic property management of RMB3.3b, RMB4.0b, and RMB5.0b, accounting for
roughly 70% of total revenue. The majority of growth was driven by growth in GFA under
management. As at end-2016, GTS’ total GFA under management stood at 105m sq.m
and accounted for only 0.6% of total market share in China. From this low base, we see no
ceiling to GTS’s growth in the foreseeable future.
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GFA sold (b sqm) GFA completion (b sq.m)
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201
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GFA sold growth (% YoY) GFA completion grwoth (% YoY)
GFA completion
trending up
nationwide
Stable fee level
Ample room to
grow
GREENTOWN SERVICE (2869 HK) | 2 June 2017
CCBI SECURITIES 4
GTS – share of nationwide market
Source: NBS, China Index Academy, CCBIS estimates for FY17F
Furthermore, as at end-2016 GTS has GFA119m of reserved GFA, which consisted of GFA
of properties under construction and which GTS would manage upon delivery. This chunk
of reserve suggests that, irrespective of the performance of the overall industry, GTS would
double its total scale upon conversion of reserved GFA to GFA under management and
provides an additional layer of safety for GTS’s cash flow and top line growth, in our view.
GTS – reserved GFA and GFA under management
Source: Company data, CCBIS estimates
Greentown China (3900 HK, NR), GTS’ sister company, is a reputable property developer
with a track record of over 20 years developing high-end properties in China. Sharing the
same managerial vision and corporate culture of Greentown China, GTS also focuses on
the high-end segment and has a solid reputation for the quality of its services. GTS was
ranked No. 1 in terms of customer satisfaction among all property managers in China in
2015 by China Index Academy.
In our view, GTS’ focus on high-end business and pursuit of quality give it its competitive
edge as well as another layer of safety in terms of cash collection and contract renewal.
12.4 13.4
14.4 15.4
16.4 17.5 17.5
18.6
1.1 1.1
0.36 0.40
0.47
0.60
0.67
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0
5
10
15
20
25
2010 2011 2012 2013 2014 2015 2016 2017F
Existing GFA under management (b sq.m) Newly completed GFA (b sq.m)
GTS' market share (RHS, %)
119 124
130 119
- - -
55
66
83
105
125
146
168
-
20
40
60
80
100
120
140
160
180
2013 2014 2015 2016 2017F 2018F 2019F
Reserved GFA GFA under management
GFA119m sq.m
reserved
Top ranked by
customer
satisfaction in 2015
GREENTOWN SERVICE (2869 HK) | 2 June 2017
CCBI SECURITIES 5
In addition, GTS’s level of fees charged for basic property management services is far
above the national average, which is part of the reason for its above-average profitability
versus peers, in our view.
GTS – cash collection rate and contract renewal rate Basic property management fee, RMB/sq.m/month
Source: Company data Source: China Index Academy, Company data, CCBIS esitmate
In sum, basic property management business is by nature recurrent, stable, and thus
defensive, in our view. In light of GTS’s low share of the total market currently, we believe
there is substantial room for the company to grow this segment. Based on GTS’s ample
reserve GFA, we believe the visibility of scale growth is high in the near future and we
believe GTS’ high-end focus and pursuit of quality promise strong cash collection,
contract renewal, and above average profitability for the segment.
Consulting services: moderate but sustainable growth
Consulting services refers to services GTS offers to real estate developers and local
property management companies to address various needs that arise throughout the
course of their property development cycles. For example, GTS provides project planning
and design management, construction management and marketing consulting services
during the design and development stages, and display unit management services to
facilitate sales of developed projects.
This is essentially a knowledge-based business segment that GTS can capitalize on by
leveraging its brand equity and expertise in managing high-end properties, although it is
the least important segment for GTS commercially. We estimate an 8.7% revenue and
gross profit CAGR for FY16-FY19F.
Community value-added services: a margin driver
GTS provides property owners and residents of its managed communities with access to
an array of daily necessities complemented by a wide assortment of life-style products
and services through a variety of channels. GTS’ services under this segment include
community products and services, home living services and community space services.
95.6 95.9
96.6
97.4
95.6
98.9
96.9
93
94
95
96
97
98
99
100
2013 2014 2015 2016
Cash collection rate Contract renewal rate
1.1 1.1 1.2 1.1 1.1
1.9
2.1 2.1 2.1 2.2
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0.5
1.0
1.5
2.0
2.5
2012 2013 2014 2015 2016 2017F
Top 100 property managers average GTS
High single digit
growth
GREENTOWN SERVICE (2869 HK) | 2 June 2017
CCBI SECURITIES 6
GTS – sub-segments under value-added services GTS – estimated gross profit contribution by FY19F
Source: Company data Source: CCBIS estimates
In 2016 GTS recorded revenue of RMB484m from community value-added services. This
translates into a FY13-FY16F CAGR of 60.3%, significantly higher than the 28.9% CAGR of
basic property management services and 23.2% CAGR of consulting services. Profitability
is also much better with gross profit margin being north of 40% in the past five years. We
expect community value-added services will likely be GTS’s key focus and main area of
investment in the foreseeable future.
Our valuation model currently assumes a 38.4% revenue CAGR and a 34.6% gross profit
CAGR for value-added services in FY16-FY19F and a stable gross profit margin of 40%
(FY16 GPM43.5%) during the same period. Our estimate is premised on (1) a 17% CAGR in
household penetration, which is at par to our prudent estimate of growth in GFA under
management, and (2) an 18% CAGR in average spending per household, which is
roughly 8ppt higher than nationwide retail sales growth to account for GTS’s low base.
In our view, community value-added services business is similar to the consumer
discretionary segment but with an inherent competitive advantage with regard to
distribution because products and services are generally displayed within easy reach of
end-users. The segment is all-inclusive and ranges from online merchandising to providing
home furnishing services offline.
Due to the wide variety of products and services offered and because most property
managers in China, including GTS, are still in a trial-and-error stage with regard to business
segmentation for value-added services, a numerical item-by-item breakdown of all
products and services under the value-added category is difficult to make; however, we
believe our estimates are based on prudent assumptions and that China’s ongoing trend
of consumption upgrade will work in our favor.
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10
20
30
40
50
60
70
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100
200
300
400
500
600
2013 2014 2015 2016
Revenue: community space services
Revenue: home living services
Revenue: community products and services
GPM, Community products and services
GPM, Home living services
GPM, Community space services
Community
products and
services, 263 ,
51%Home living
services, 192 ,
37%
Community
space services,
59 , 12%
40% GPM
34.6% gross profit
CAGR in FY16-FY19F
GREENTOWN SERVICE (2869 HK) | 2 June 2017
CCBI SECURITIES 7
Balance sheet: nothing beats cash
Property managers run on an asset-light business model in the sense that they do not
need to hold fixed assets. For GTS, due to its high cash collection rate and high contract-
retention rate, cash flow is recurrent and strong.
As at end-FY16, GTS held zero interest bearing debt and 69% of its total asset is in cash.
The second largest asset item was receivables and pre-payments, which came to
RMB556m at end-FY16 and accounted for 17% of total assets. While receivables imply
some degree of counter-party risk, we believe it is more than off-set by GTS’ payables of
RMB942m at end-FY16. We expect GTS to sustain its balance sheet strength in the
foreseeable future. On the flip side, a more aggressive capex plan, provided that it is at a
reasonable rate of return, would further increase shareholder value, in our view. Overall,
GTS’s solid balance sheet strength is a key reason of our optimism for its future
development.
GTS – composition of total assets (RMB 3.3b) (FY16) GTS – composition of total assets (RMB 4.0b) (FY17F)
Source: Company data Source: Company data, CCBIS estimates
GTS – composition of total liability (RMB 1.6b) (FY16) GTS – composition of total liability (RMB 2.0b) (FY17F)
Source: Company data Source: Company data, CCBIS estimates
Cash and
equivalent
69%
Receivables
and pre-
payments
17%
Investment
in JCE
4%
Fixed asset
8%
Others asset
2%
Cash and
equivalent
69%
Receivables
and pre-
payments
18%
Investment
in JCE
4%
Fixed asset
7%Others asset
2%
Payable
and
deposits
60%
Receipts in
advance
37%
other liability
3%
Payable
and
deposits
59%
Receipts in
advance
38%
other liability
3%
69% of total asset is
cash
GREENTOWN SERVICE (2869 HK) | 2 June 2017
CCBI SECURITIES 8
Financial summary and changes in estimates
FY16
FY17F FY18F FY19F
New Old
(%)
Chg BBg (%) Diff New Old
(%)
Chg BBg (%) Diff New Old
(%)
Chg BBg (%) Diff
Income statement
Revenue (RMB m) 3,722 4,697 4,569 2.8 4,735 -0.8 5,624 5,395 4.2 5,801 -3.1 7,082 6,529 8.5 7,643 -7.3
- Property management 2,620 3,334 3,177 4.9 N/A N/A 3,999 3,672 8.9 N/A N/A 5,002 4,443 12.6 N/A N/A
- Consulting 618 686 680 1.0 N/A N/A 701 770 -8.9 N/A N/A 795 872 -8.9 N/A N/A
- Value-added services 484 677 712 -5.0 N/A N/A 924 954 -3.1 N/A N/A 1,285 1,214 5.8 N/A N/A
Gross profit (RMB m) 716 881 872 1.0 930 -5.3 1,058 1,056 0.2 1,179 -10.2 1,346 1,283 4.9 1,644 -18.1
- Property management 286 367 349 4.9 N/A N/A 440 404 8.9 N/A N/A 550 489 12.6 N/A N/A
- Consulting 219 244 238 2.4 N/A N/A 249 271 -8.2 N/A N/A 282 309 -8.8 N/A N/A
- Value-added services 210 271 285 -5.0 N/A N/A 370 381 -3.1 N/A N/A 514 485 5.8 N/A N/A
Gross profit margin (%) 19.2 18.8 19.1 -0.3 pt 19.6 -0.8 pt 18.8 19.6 -0.8 pt 20.3 -7.4 19.0 19.7 -3.3 21.5 -11.6
- Property management 10.9 11.0 11.0 - N/A N/A 11.0 11.0 - N/A N/A 11.0 11.0 - N/A N/A
- Consulting 35.5 35.5 35.0 +0.5 pt N/A N/A 35.5 35.2 +0.3 pt N/A N/A 35.5 35.5 0.1 N/A N/A
- Value-added services 43.5 40.0 40.0 - N/A N/A 40.0 40.0 0 N/A N/A 40.0 40.0 0.0 N/A N/A
SG&A -284.7 -321.7 -344.9 -6.7 N/A N/A -390.8 -401.9 -2.8 N/A N/A -499.2 -479.8 4.0 N/A N/A
Core net profit (RMB m) 285.6 382.9 354.3 8.1 381.1 0.5 456.1 437.4 4.3 494.1 -7.7 577.1 534.3 8.0 704.4 -18.1
Core net profit margin (%) 7.7 8.2 7.8 +0.4pt 8.0 +0.2 pt 8.1 8.1 - 8.5 -0.4pt 8.1 8.2 -0.4 9.2 -1.1pt
EPS (RMB) 0.10 0.14 0.13 8.1 0.14 -0.1 0.16 0.16 4.3 0.18 -9.3 0.21 0.19 8.0 0.25 -18.2
DPS (RMB) 0.04 0.05 0.05 -5.5 0.05 2.6 0.06 0.06 -8.8 0.06 -5.8 0.07 0.08 -5.5 0.08 -8.0
Net cash (RMB m) 2,296 2,762 2,535 8.9 N/A N/A 3,251 2,861 13.6 N/A N/A 3,935 3,223 22.1 N/A N/A
Net cash per share (RMB) 0.8 1.0 0.9 8.9 N/A N/A 1.2 1.0 13.6 N/A N/A 1.4 1.2 22.1 N/A N/A
Balance sheet
Total assets 3,322.7 3,988.4 3,787.2 5.3 N/A N/A 4,677.0 4,343.2 7.7 N/A N/A 5,667.1 5,006.3 13.2 N/A N/A
Cash and restricted cash 2,296.3 2,762.1 2,535.5 8.9 N/A N/A 3,251.1 2,861.2 13.6 N/A N/A 3,935.4 3,223.2 22.1 N/A N/A
Other investment - - - N/A N/A N/A - - N/A N/A N/A - - N/A N/A N/A
Receivables 453.1 571.8 685.4 -16.6 N/A N/A 684.6 809.3 -15.4 N/A N/A 862.0 979.4 -12.0 N/A N/A
Deposits & prepayment 103.3 146.9 - N/A N/A N/A 198.5 - N/A N/A N/A 282.5 - N/A N/A N/A
Tax asset 50.7 57.6 60.8 -5.4 N/A N/A 62.1 73.0 -15.0 N/A N/A 70.3 87.6 -19.7 N/A N/A
Due from related parties 18.1 19.9 - N/A N/A N/A 21.9 - N/A N/A N/A 24.0 - N/A N/A N/A
Investment JCE & Assoc. 126.7 139.4 164.7 -15.4 N/A N/A 153.3 214.1 -28.4 N/A N/A 168.6 278.4 -39.4 N/A N/A
Other investment - - - N/A N/A N/A - - N/A N/A N/A - - N/A N/A N/A
Inventory 10.1 19.7 11.6 70.3 N/A N/A 29.6 13.3 122.3 N/A N/A 45.2 15.3 195.6 N/A N/A
Fixed asset 264.5 271.1 304.1 -10.9 N/A N/A 276.0 349.8 -21.1 N/A N/A 278.8 402.2 -30.7 N/A N/A
Other asset - - 25.0 -100.0 N/A N/A - 22.5 -100.0 N/A N/A - 20.2 -100.0 N/A N/A
Total liability 1,577.0 1,982.4 1,820.3 8.9 N/A N/A 2,360.8 2,101.7 12.3 N/A N/A 2,958.3 2,427.3 21.9 N/A N/A
Borrowings - - - N/A N/A N/A - - N/A N/A N/A - - N/A N/A N/A
Payables 942.9 1,177.5 1,084.4 8.6 N/A N/A 1,398.0 1,247.1 12.1 N/A N/A 1,744.7 1,434.1 21.7 N/A N/A
Receipts and deposits 591.7 750.8 544.2 38.0 N/A N/A 898.1 625.8 43.5 N/A N/A 1,132.0 719.7 57.3 N/A N/A
Due to related parties - - - N/A N/A N/A - - N/A N/A N/A - - N/A N/A N/A
Tax liabilities 10.8 14.3 142.2 -89.9 N/A N/A 17.1 170.6 -90.0 N/A N/A 21.6 204.7 -89.5 N/A N/A
Other liabilities 31.5 39.8 49.5 -19.6 N/A N/A 47.7 58.2 -18.1 N/A N/A 60.0 68.8 -12.7 N/A N/A
Total equity 1,745.7 2,006.0 1,966.9 2.0 N/A N/A 2,316.2 2,241.5 3.3 N/A N/A 2,708.8 2,579.0 5.0 N/A N/A
Shareholder's equity 1,719.0 1,967.9 1,928.1 2.1 N/A N/A 2,264.4 2,187.2 3.5 N/A N/A 2,639.6 2,504.3 5.4 N/A N/A
Minority interest 26.7 38.1 38.8 -1.7 N/A N/A 51.8 54.4 -4.8 N/A N/A 69.2 74.7 -7.4 N/A N/A
Capital securities - - - N/A N/A N/A - - N/A N/A N/A - - N/A N/A N/A
ROAE (%) 30.1 20.4 19.1 +1.3pt N/A N/A 21.1 20.8 +0.3pt N/A N/A 23.0 22.2 +0.8pt N/A N/A
Core net profit margin (%) 7.7 8.2 7.8 +0.4pt 8.0 +0.2 pt 8.1 8.1 - 8.5 -0.4pt 8.1 8.2 -0.4 9.2 -1.1pt
Average asset turnover (x) 1.5 1.3 1.3 -0.0 N/A N/A 1.3 1.3 -2.2 N/A N/A 1.4 1.4 -2.0 N/A N/A
Average leverage (x) 2.6 1.9 1.9 1.8 N/A N/A 2.0 1.9 3.8 N/A N/A 2.1 1.9 6.1 N/A N/A
Source: Company data, Bloomberg consensus estimates, CCBIS estimates
GREENTOWN SERVICE (2869 HK) | 2 June 2017
CCBI SECURITIES 9
22.0X rolling FY17F P/E, 14.4X ex-cash
GTS’ share price increased 42.6% in YTD 2017 and 88.4% since its IPO in Jul 2016. The
company is currently valued at 22.0x FY17F P/E and 14.8x FY17F ex-cash forward P/E on a
rolling basis. Based on the company’s highly visible growth potential and strong balance
sheet, we consider the current valuation undemanding.
GTS – 12-month rolling forward P/E and ex-cash P/E
Source: Bloomberg, company data, CCBIS estimates for FY17F EPS
New HK$5.11 target price implies 36.8% upside
After fine-tuning our estimates by moderately increasing our revenue estimate for basic
property management and consulting services and lowering our revenue estimate for
value-added services, we slightly increase our FY17F revenue estimate by 2.8% to RMB4,
697m. In addition, we lower our estimate for FY17F SG&A expenses by 6.7% as we believe
cost control will be one of GTS’ focuses in FY17F. Net-net, we increase our FY17F core net
profit and EPS estimate by 8.1%. We believe downside risks to our estimates are limited.
Upside risk to our estimate would mainly come from better-than-expected performance
from GTS’s venture into the early-education sector, which is currently not in our valuation
model and will be discussed in a subsequent section.
We believe growth-adjusted ex-cash P/E is the appropriate methodology for valuing the
China property managers. Using a target PEG of one we derive our growth adjusted
FY17F target P/E of 26.4x (up from 23.3x) based on FY16-FY19F estimated EPS CAGR of 26.4%
(up from 23.3%). Adding to this forecast FY17F cash per share of HK$1.10 (up from HK$1.03),
we arrive at our target price of HK$5.11 (up from HK$4.32). The numeric derivation of our
target price in shown in the table below.
GTS – derivation of target price
Target
PEG
FY16-FY19F
EPS CAGR Implied PE
FY17F
ex-cash EPS
=
FY17F
EPS
-
FY17F net interest
income per share
P/E based
valuation
+
FY17F Cash
per share
=
Target price
(%) (x) HK$ HK$ RMB HK$ HK$
1 26.4 26.4 0.15 0.16 0.003 4.05 1.07 HK$5.11
Source: Bloomberg, CCBIS estimates
8
10
12
14
16
18
20
22
24
Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17
P/E Average P/E +1 stdev -1 stdev EX-cash P/E
Valuation
undemanding on an
ex-cash basis
Lift target price to
HK$5.11 from
HK$4.32
GREENTOWN SERVICE (2869 HK) | 2 June 2017
CCBI SECURITIES 10
Appendix 1: New business potential
Our attendance at GTS’ reverse roadshow in Hangzhou on 29 May 2017 reaffirmed our
appreciation of its pursuit of quality, which we believe is reflected in the customer-first
attitude and detail-oriented hospitality of GTS employees we met. More importantly,
based on our visit and discussion with management and front-line managers we believe
there are positive changes on the horizon for GTS.
Strong government relationship fosters future business opportunities
According to local management, GTS successfully secured a government contract to
manage Hangzhou Public Service Center in 2017. The building is a state-owned landmark
building and home to Hangzhou municipal government.
The contract entails that GTS is entitled to receive a fixed payment of RMB19m p.a. plus a
performance fee which will be reviewed annually. GTS has over 100 employees stationed
at the site to ensure the best service and maintenance quality possible.
Although the contract is barely breaking-even currently, management believes that it will
strengthen GTS’s relationship with the local government and may create future
opportunities for GTS to manage other government buildings in Hangzhou and Zhejiang
province and also may lead to business opportunities when Hangzhou hosts the G20
summit in 2016 and Asia Olympic Games in 2022, both of which will boost local
infrastructure investment and construction activity. There will be more government
contracts available to GTS going forward, we believe.
In our view, the successful sourcing of this project management contract is a strong
testament of GTS’ brand equity and its influence in Hangzhou, the capital city of Zhejiang
province, and Zhejiang province. Generally speaking, government contacts are of lower
profitability comparing to private contracts but are stable and recurrent with minimum
counter-party risks. We expect GTS to secure similar contracts in Zhejiang and believe this
will boost GTS’ earning growth and sustainability going forward.
Hangzhou CBD overview Atrium of Hangzhou government building
Source: CCBIS Source: CCBIS
Monetizing on
government
contracts
GREENTOWN SERVICE (2869 HK) | 2 June 2017
CCBI SECURITIES 11
New venture into education sector could be the new growth driver
Since late 2016 GTS has quietly ventured into the education sector by establishing
daycare centers in communities it manages. The larger plan is to open 100 such centers
with annual revenue of RMB5m per center by 2019.
The centers include conventional daycare services as well as academic courses that
match China’s public school curriculums. GTS also offers a variety of extra-curricular
classes such as art and music classes. Classes generally have 15 students and cost a
monthly fee of RMB5,000 plus addition charges per child for meals. There are currently 18
full-time teachers per center. We visited GTS’ day-care center attached to the Xixi Sincere
Garden project a noted full enrollment at the time of our visit.
Based on the strong performance of the existing daycare centers we believe there is a
solid chance that GTS will meet its goal. However, we have not included this new venture
into our earnings estimates due to its short track record. Assuming GTS could roll out its
schools according to plan and an average net margin of 20%, we believe inclusion of the
education segment would increase GTS’s FY19F core EPS by an estimated14%. In our view
it could be a new and sustainable source of growth for GTS in the long-term that would
offer substantial upside for investors of GTS.
GTS – Xixi Sincere Garden and daycare center GTS – daycare center interior
Source: CCBIS Source: CCBIS
GREENTOWN SERVICE (2869 HK) | 2 June 2017
CCBI SECURITIES 12
Greentown Service | 2869 HK – financial summary
Profit and loss
FYE 31 Dec (RMB m) 2015 2016 2017F 2018F 2019F
Basic prop management 2,091 2,620 3,334 3,999 5,002
Engineering services 551 618 686 701 795
Community services 277 484 677 924 1,285
Revenue 2,919 3,722 4,697 5,624 7,082
COGS (2,388) (3,006) (3,816) (4,566) (5,736)
Gross profit 531 716 881 1,058 1,346
Other inc. and disposal gains (9) (15) (18) (22) (28)
SG&A (238) (285) (322) (391) (499)
Operating expenses (238) (285) (322) (391) (499)
EBIT 284 417 541 646 819
Net financial income(exp) (7) (2) 6 7 8
JVs & associates 1.5 3.4 7.4 8.2 9.0
Pretax exceptional (0.1) 0.0 - - -
Profit before tax 278 419 555 661 837
Tax (76) (124) (161) (191) (242)
Total profit 203 295 394 470 594
Minority interest (5) (9) (11) (14) (17)
Attributable net profit 198 286 383 456 577
Core profit 198 286 383 456 577
Reported EPS (RMB) 0.10 0.14 0.14 0.16 0.21
Diluted EPS (RMB) 0.10 0.10 0.14 0.16 0.21
Core EPS (RMB) 0.10 0.10 0.14 0.16 0.21
Dividend (RMB)(m) 230 100 134 160 202
DPS (RMB) 0.12 0.04 0.05 0.06 0.07
Balance sheet
FYE 31 Dec (RMB m) 2015 2016 2017F 2018F 2019F
Cash & equivalents 836 2,182 2,621 3,082 3,720
Pledge dep., restricted
cash
91 115 141 169 216
Receivables 346 529 677 823 1,053
Amount due from related
parties
74 18 20 22 24
Inventory 2 10 20 30 45
Other current assets 28 – – – –
Total current assets 1,377 2,853 3,478 4,125 5,058
PPE/Investment property 64 264 271 276 279
JVs & associates 15 127 139 153 169
Other non-current assets 186 78 100 122 162
Total non-current assets 265 470 510 552 609
Total assets 1,642 3,323 3,988 4,677 5,667
Short-term borrowings 180 – – – –
Payable and advances 967 1,062 1,328 1,578 1,971
Other current liabilities 180 – – – 943
Total current liabilities 1,472 1,555 1,953 2,326 2,915
Other non-current liabilities 21 22 29 35 44
Total non-current liabilities 21 22 29 35 44
Total liabilities 1,493 1,577 1,982 2,361 2,958
Reserves 132 1,719 1,968 2,264 2,640
Shareholders' equity 132 1,719 1,968 2,264 2,640
Minority interest 17 27 38 52 69
Total equity 149 1,746 2,006 2,316 2,709
Total equity and liabilities 1,642 3,323 3,988 4,677 5,667
Cash flow
FYE 31 Dec (RMB m) 2015 2016 2017F 2018F 2019F
Profit before tax 278 419 555 661 837
Amortization & depr. 13 15 13 16 19
Financial charge adj. 9 7 – – –
Non-cash items adjusted 19 20 17 20 32
Change in working capital 257 13 157 120 201
Tax paid (65) (80) (161) (191) (242)
Operating cash flow 510.8 393.7 581.1 625.6 845.8
Net acquisition (58) (84) (23) (25) (26)
Capex 187 (69) 4 4 4
Investment 0 0 5 5 8
Net interest received(paid) 2 3 6 7 8
Other 0 2 - 3 -
Investment cash flow 132 (147) (8) (5) (6)
Change in borrowings 80 (180) – – –
Equity issues - 1,266 - - -
Dividend paid (265) (22) (134) (160) (202)
Other (59) (7) - - -
Financing cash flow (244) 1,057 (134) (160) (202)
Change in cash flow 399 1,303 439 461 638
Cash & equivalents, begin 437 836 2,182 2,621 3,082
Forex (0) 42 – – –
Cash & equivalents, end 836 2,182 2,621 3,082 3,720
Free cash flow 640 241 567 610 832
Ratios
FYE 31 Dec 2015 2016 2017F 2018F 2019F
Growth (%)
Revenue 32.4 27.5 26.2 19.7 25.9
EBIT 42.0 46.9 29.8 19.3 26.9
Net profit 32.4 44.3 34.1 19.1 26.5
Core net profit 32.5 44.5 34.1 19.1 26.5
Dividend 91.7 (56.5) 34.1 19.1 26.5
Profitability (%)
Gross margin 18.2 19.2 18.8 18.8 19.0
EBIT margin 9.7 11.2 11.5 11.5 11.6
Net margin 6.8 7.7 8.2 8.1 8.1
Core net margin 6.8 7.7 8.2 8.1 8.1
Dividend payout 116.3 35.0 35.0 35.0 35.0
Tax rate 27.2 29.6 28.9 28.9 28.9
Accruals
Payable turnover (days) 112.6 108.7 101.4 102.9 100.0
Receivable turnover (days) 32.4 36.7 39.8 40.8 39.9
Net operating cash flow 510.8 393.7 581.1 625.6 845.8
Returns & leverage (%)
ROAA 13.4 11.5 10.5 10.5 11.2
Equity multiplier 8.0 2.6 1.9 2.0 2.1
ROAE 108.0 30.1 20.4 21.1 23.0
Net debt to equity (501.5) (131.5) (137.7) (140.4) (145.3)
Liquidity (x)
Current ratio 0.9 1.8 1.8 1.8 1.7
Quick ratio 0.9 1.8 1.8 1.8 1.7
Source: Company, CCBIS estimates
GREENTOWN SERVICE (2869 HK) | 2 June 2017
CCBI SECURITIES 13
Rating definitions:
Outperform (O) – expected return > 10% over the next twelve months Neutral (N) – expected return between -10% and 10% over the next twelve months Underperform (U) – expected return < -10% over the next twelve months
Analyst certification:
The author(s) of this document, hereby declare that: (i) all of the views expressed in this document accurately reflect his personal views about any and all of the subject securities or issuers and were prepared in an independent manner; and (ii) no part of any of his compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this document; and (iii) he receives no insider information/non-public price-sensitive information in relation to the subject securities or issuers which may influence the recommendations made by him. The author(s) of this document further confirm that (i) neither he nor his respective associate(s) (as defined in the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission issued by the Hong Kong Securities and Futures Commission) has dealt in or traded in the securities covered in this document within 30 calendar days prior to the date of issue of this document or will so deal in or trade such securities within 3 business days (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) after the date of issue of this document; (ii) neither he nor his respective associate(s) serves as an officer of any of the companies covered in this document; and (iii) neither he nor his respective associate(s) has any financial interests in the securities covered in this document.
CCBI Group has had investment banking relationship with Greentown Service Group [2869 HK].
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GREENTOWN SERVICE (2869 HK) | 2 June 2017
CCBI SECURITIES 14
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