20220104-招银国际-融创服务-01516.HK-Our_read_on_its_termination_of_first_service_acquisition_and_latest_operation_update_4页_796kb

Summary of Sunac Services (1516 HK) Company Update

Core Content

This report provides an equity research update on Sunac Services (1516 HK), focusing on the termination of the acquisition of First Service (2107 HK) and the company's latest operational performance. The analysis is conducted by CMB International Securities, with a BUY rating and a target price of HK$29.80, indicating a potential upside of +300% from the current price of HK$7.00.

Key Information

• Deal Termination: The acquisition of First Service was terminated due to the parent company Modern Land's bond default and disagreement with the revised consideration. This decision is viewed positively by analysts as the deal was considered too expensive (14x 2021E PE) and too risky, especially with the parent company's financial distress.

• Valuation Impact: With a current valuation of 11x 2021E PE, which is more attractive than the 27x of CGS, the termination may provide short-term upward support to the share price.

• Parent Company Dependency: 62% of Sunac Services' revenue is tied to its parent company, Sunac Property, meaning the company's re-rating will depend heavily on the parent company's outlook in the near term.

• Operational Update: Management highlighted the negative impact on GFA delivery due to weak property sentiment. However, they have diversified by expanding third-party GFA, which increased 200% YoY in 2021E, and non-residential GFA now accounts for 40% of total GFA from third parties, helping to offset parent company risk.

• Earnings Guidance: Despite the challenges, management is confident in achieving the 2021E earnings guidance, with a revenue growth of 48.6% and net profit growth of 105.3% expected for FY21E.

• Financial Overview:

  • Revenue has shown consistent growth, reaching RMB21,021 million in FY23E.
  • Net profit is projected to increase from RMB270 million in FY19A to RMB3,103 million in FY23E.
  • EPS is expected to rise from RMB0.12 in FY19A to RMB1.28 in FY23E.
  • P/E ratio has dropped significantly from 52.3x in FY20A to 7.0x in FY23E.
  • ROE has increased from 73.5% in FY19A to 22.5% in FY23E.

• Cash Flow and Balance Sheet:

  • Net cash from operating activities is expected to increase, with RMB5,873 million projected for FY23E.
  • Cash and cash equivalents are expected to grow from RMB1,090 million in FY19A to RMB15,750 million in FY23E.
  • Total assets are projected to grow from RMB2,271 million in FY19A to RMB27,291 million in FY23E.
  • Total liabilities are expected to rise from RMB1,773 million in FY19A to RMB13,679 million in FY23E.
  • Equity to shareholders is projected to increase from RMB498 million in FY19A to RMB13,612 million in FY23E.

• Key Ratios:

  • Gross margin has remained relatively stable, from 25.5% in FY19A to 28.7% in FY23E.
  • Net margin has increased from 9.5% in FY19A to 14.6% in FY23E.
  • ROE has grown from 73.5% in FY19A to 22.5% in FY23E.
  • Current ratio has declined from 3.7x in FY20A to 1.6x in FY23E, indicating a more constrained liquidity position.

Main Points

• The termination of the First Service acquisition is seen as positive, due to the deal's high cost and parent company risk.
• Third-party expansion has helped diversify revenue and mitigate parent company dependency, with GFA contracted up 200% YoY in 2021.
• Non-residential GFA now makes up 40% of third-party GFA, contributing to a more balanced portfolio.
• Despite the parent company dependency, the company is expected to achieve its earnings guidance for FY21E, with revenue and profit growth continuing into the future.
• The current valuation is considered attractive, at 11x 2021E PE, though volatility is expected due to ongoing reliance on the parent company.

Market Position and Comparisons

• Sunac Services is compared to other property service companies, such as Country Garden Services (6098 HK) and CR MixC Lifestyle (1209 HK), with a BUY rating and a target price of HK$29.80.
• The P/E ratio of Sunac Services is significantly lower than its peers, suggesting potential for re-rating in the future.
• The profit growth is expected to remain strong, with a CAGR of 105.3% for FY21E and 60.6% for FY22E.

Analyst View

• The analyst's view is that while the re-rating is expected to be influenced by the parent company's outlook, the current valuation is attractive.
• The company's diversification efforts and financial stability are seen as positive factors for future performance.

Conclusion

Sunac Services is currently in a positive position, with a BUY rating and a target price that reflects a high potential return. The termination of the First Service acquisition is viewed as a strategic move that reduces risk and improves financial stability. The company's diversification into third-party and non-residential GFA is expected to mitigate parent company dependency, supporting its future growth and re-rating potential.