20211021-招银国际-恒大物业-06666.HK-Pressure_mounts_after_cancelled_sale_4页_806kb

Evergrande Property Services (6666 HK) Company Update Summary

Core Content Overview

This document provides an equity research update on Evergrande Property Services (6666 HK), a subsidiary of Evergrande Group, highlighting recent developments, financial performance, and market valuation. The report is issued by CMB International Securities, with a BUY recommendation and a target price of HK$10.39, indicating a potential upside of +102.9% from the current price of HK$5.12.

Key Events

• Sale Termination: Evergrande has terminated the sale of 50.1% of Evergrande PM shares to Hopson. The deal was intended to raise HK$20bn, but Hopson rejected the payment terms, preferring to pay Evergrande PM directly instead of Evergrande Group. This termination may trigger a mandatory general offer.
• Asset Revitalization Pressure: With the deal failing, Evergrande faces challenges in revitalizing its assets and fulfilling delivery commitments. The company has 121 projects in the guaranteed delivery region (YRD and PRD) with a total GFA of 35 million sq m and a salable value of RMB311bn.
• Construction Cost and Funding Need: Assuming a construction cost of RMB3k/sq m and 40% of work remaining, Evergrande needs approximately RMB42bn to complete these projects. This adds pressure on the valuation of Evergrande PM.

Valuation Analysis

• P/E Ratio: Before the trading halt, Evergrande PM was trading at 13.21x 2021E PE, significantly below its 5-year historical average of 33.83x and 1 SD below the average of 16.85x.
• P/B Ratio: The P/B ratio has also declined over the years, from 3.4x in 2021E to 1.7x in 2023E, reflecting a potential undervaluation or market concerns.
• ROE: Return on equity has decreased from 52.8% in FY19A to 31.6% in FY23E, indicating a reduction in profitability relative to equity.

Financial Performance Summary

Earnings and Profitability Trends

• Revenue Growth: Evergrande Property Services has shown consistent revenue growth, with a 61.9% increase in FY21E and 44.8% in FY23E.
• EPS Growth: EPS has increased significantly from 0.09 in FY19A to 0.80 in FY23E, reflecting improved earnings per share.
• Gross Margin: Gross margin has remained relatively stable, from 23.9% in FY19A to 35.5% in FY23E, indicating effective cost management.
• Net Margin: Net margin has steadily increased from 12.7% in FY19A to 22.1% in FY23E, suggesting better profitability.

Balance Sheet Highlights

• Total Assets: Total assets have grown from RMB21,650mn in FY21E to RMB37,490mn in FY23E.
• Equity to Shareholders: Equity to shareholders increased from RMB13,664mn in FY21E to RMB27,356mn in FY23E.
• Current Ratio: The current ratio has remained stable at around 2.1x in FY21E and 2.3x in FY23E, indicating strong short-term liquidity.
• Net Gearing: Net gearing has remained at "Net cash" for all periods, showing a strong cash position.

Cash Flow Summary

• Net Cash from Operating Activities: Increased from (RMB368mn) in FY19A to RMB8,772mn in FY23E, reflecting improved operational cash flows.
• Net Change in Cash: Increased from (RMB370mn) in FY19A to RMB2,912mn in FY23E, indicating better cash management.

Market Position and Key Ratios

• Shareholding Structure: Evergrande Group holds 60.96% of the shares, while the free float is 39.04%.
• Market Cap: As of the latest data, the market cap is HK$55,351mn.
• Share Performance: The share price has declined by -68.7% over 6 months and -43.6% over 3 months, with a relative performance of -36.2% and -63.7% respectively.
• Key Ratios: The company has a high ROE and ROA, indicating strong returns on equity and assets.

Comparison with Peers

Conclusion

Evergrande Property Services faces significant challenges due to the cancellation of the Hopson sale, which could hinder its ability to secure additional funding. However, the company has shown strong financial performance, with consistent revenue growth and improving profitability. Despite the current low valuation and market pressure, the BUY recommendation suggests potential for recovery and growth in the coming year. Investors should consider the company's ability to secure new funding sources and its progress in asset revitalization and delivery commitments.