China Property Management Sector: Is there a valuation floor?


We believe China’s property management sector’s defensive profile has yet to be recognised. Find out why we see only 9% downside from floor valuation.
Group Research13 Oct 2021
  • Large and mid-caps are just c.9% shy of our estimated valuation floor …
  • … if we assume these are defensive dividend plays with zero growth
  • Small caps are 28% away from being attractive M&A targets
  • Trading not far from valuation floor; adding A-Living to our top picks on limited downside risks
    Photo credit: AFP Photo


     

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    Sector’s defensive profile yet to be recognised with only 9% downside from floor valuation if large and mid-cap names are treated as dividend plays with zero growth from FY22F. Given the industry’s recurring business nature and asset-light model, we believe property managers (PMs) will be raising dividend payout ratios as they reach the “maturity” stage of the sector’s life cycle given limited capex requirements from then on. We have used this assumption as the basis of our scenario analysis to derive the floor valuation for large and mid-cap PMs, after removing their growth components to account for market concerns over the sector’s growth prospects. We have assumed: (1) zero earnings growth from 2023; 2) PMs to lift dividend payout ratios to 90%; and 3) investors requiring an unlevered dividend yield of 5.5%/8% for large/mid-caps. Our analysis shows that large and mid-cap PMs on average are trading at just 9% above our derived valuation floors under our extreme scenario after recent months of sell-off, led by concerns on future growth prospects. A-Living is already trading at a deep 45% discount to its valuation floor.

    Viewing small-caps as potential acquisition targets by large caps. We believe small caps will likely see valuation support as they trade closer to the level seen as attractive acquisition targets. We arrived at floor valuations for these names via 1) excluding earnings contributions from non-property owner VAS; and 2) imputing a privatisation premium of 40% – with reference to Country Garden Services (CGS)’s deal on Languang Justbon. On average, they are 28% above our estimated floor valuations at their current prices. Aoyuan Healthy Life is already trading at a valuation that makes it attractive as the next M&A target for large caps.

    Adding A-Living to our top picks. We believe the sector sell-off led by market concerns over earnings growth prospects has been overdone, and the sector’s defensive qualities have been neglected. Based on our scenario analysis, we believe the sector is not far from the theoretical floor valuation. We added A-Living as one of our sector top picks given limited downside risk as shown in our analysis, serving as the best candidate for bottom-fishing, along with CGS that we previously identified as a long-term sector outperformer.


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    Note: All views expressed are current as at the stated date of publication.


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