20220328-招银国际-新城悦服务-01755.HK-Heavy_bond_investment_loss_led_to_governance_concern_5页_861kb

S-Enjoy Service (1755 HK) Summary

Core Content

S-Enjoy Service (1755 HK) is a property services company that has faced a downgrade to a SELL rating due to several critical issues. The main concerns include:

• Heavy bond investment loss: The company recorded a loss of approximately RMB150mn in 2H21 from USD bond investments, which may lead to further losses. In 1H21, it added an additional RMB156mn to its USD bond portfolio, increasing the risk of more haircuts.
• 2021 results missed expectations: The company's 2021 net income was RMB525mn, which is 16% YoY growth but 23% below the estimate. This was mainly due to a RMB250mn loss on financial and other assets.
• Dividend cut: The dividend payout ratio dropped from 51% in 2020 to 25% in 2021, with a 45% YoY decrease in dividend per share (DPS) to HK$0.155/share.
• Margin pressure: The company's net margin decreased to 12.1% in 2021, and the overall group margin is expected to decline from 31% in 2021 to 27–29% in 2022–2024 due to higher costs and market conditions.

Main Points

Financial Performance in 2021

• Revenue: Increased by 52% YoY to RMB4.35bn, driven by Property Management (PM) and Community VAS segments.
• Net Income: Rose by 16% YoY to RMB525mn, but missed estimates by 23%.
• EPS: Increased to RMB0.62/share, up 13% YoY.
• P/E Ratio: Dropped from 13.2x in 2021 to 7.1x in 2022E.
• Dividend Payout Ratio: Fell from 51% in 2020 to 25% in 2021, representing a 26ppt YoY decrease.
• ROE: Declined from 35.3% in 2020 to 23.0% in 2021.

Corporate Governance Concerns

• USD Bond Investment: The company held RMB342mn worth of USD bonds in 1H21, which led to a RMB150mn loss in 2H21. This raised concerns about the company's use of cash to invest in high-risk assets.
• Potential for Further Losses: The company may face another RMB100mn loss by 1H22E due to ongoing USD bond price declines.
• Dividend Cut: The significant reduction in dividend payout signals financial strain and may affect investor confidence.

Margin Pressures

• PM Segment: Grew by 67% YoY in 2021, but the margin is too high and may face downward pressure due to higher costs and more third-party projects.
• Community VAS: Grew by 84% YoY, but its GP Margin dropped slightly to 42.4% in 2021.
• Overall Group Margin: Expected to decline from 31% in 2021 to 27–29% in 2022–2024 due to the combination of third-party expansion and external factors like the pandemic and bond market conditions.

Key Information

Earnings Summary

Valuation and Target Price

• Target Price: Revised to HK$8.48, a 14.1% downside from the current price of HK$9.87.
• P/E Ratio: Expected to drop to 7.1x in 2022E, compared to 10.1x in 2021.
• P/B Ratio: Projected to fall to 1.6x in 2024E, down from 5.5x in 2020.
• Yield: Increased from 1.9% in 2021 to 4.4% in 2024E.
• ROE: Expected to decrease to 25.8% in 2024E, down from 35.3% in 2020.

Shareholding and Performance

• Shareholding Structure: Wang Zhenhua holds 68.9% of shares, with 31.1% free float.
• Share Performance:
  • 1-month: -28.7%
  • 3-month: -11.9%
  • 6-month: -34.8%
  • 12-month: -53.2%

Analyst Ratings

• CMBIGM Rating: SELL
• Industry Peers:
  • Country Garden Services (6098 HK): BUY
  • CR MixC Lifestyle (1209 HK): BUY
  • A-Living (3319 HK): HOLD
  • Greentown Services (2869 HK): HOLD
  • Ever Sunshine (1995 HK): HOLD
  • Poly Services (6049 HK): HOLD
  • S-Enjoy (1755 HK): SELL

Conclusion

S-Enjoy Service is facing significant challenges, including governance issues from its USD bond investments, missed earnings in 2021, and margin pressures. These issues have led to a dividend cut and a downgrade to SELL. The company is expected to see declining margins and reduced profitability over the next few years, which could affect its valuation and share price performance.