China Property Management Firms Earnings: Valuation Cut on More Downbeat Growth Projection

We cut our fair value estimate on Country Garden Services, or CGS, to HKD 17.50 from HKD 42.50 and on Greentown Service Group, or GSG, to HKD 5.20 from HKD 6.50. This is mainly due to our more conservative top-line growth forecast for both firms, particularly for property management and value-added services, or VAS, to nonproperty owners. While CGS and GSG both saw expansion in gross floor area under management, or GUM, for the first half of 2023, we expect competition over high-quality third-party projects to intensify, weighing down their long-run growth trajectory. As such, we model a respective 5.7% and 12.4% property management revenue 2022-27 CAGR for CGS and GSG, down from 12.9% and 15.7% previously. Also, we expect the two firms’ VAS to nonproperty owners to downsize under property developers’ ongoing liquidity strains. However, we think both firms should see recovery in VAS to homeowners as demand rebounds under normalized services. Although we fine-tuned our valuation for CGS and GSG, we still view both firms’ shares as cheap, as their decent profitability warranted by asset-light business models have not been fully priced in.