20201222-招银国际-弘阳服务-01971.HK-VAS_to_drive_a_strong_2020E_and_re-rating_5页_824kb

Summary of Redsun Services (1971 HK) Equity Research Update

Core Content

CMB International Securities has issued an updated equity research report on Redsun Services (1971 HK), highlighting its potential for strong performance in 2020E and a re-rating due to the growth of its Value-Added Services (VAS). The report maintains a BUY rating and raises the target price to HK$9.17.

Key Highlights

• Earnings Growth: The company is expected to deliver core profits of RMB88mn in 2020E, growing 50% YoY, which is stronger than the market expectation of 40%. This growth is attributed to the performance of VAS, particularly in the agent business and advertisement business.

• Earnings Revisions: CMBIS has revised up the 2020/21/22E earnings by 16% /4%/3.5%, respectively, to reflect the strong VAS growth. VAS is estimated to contribute 35% to total gross profit by 2022E.

• Target Price & Valuation: The target price is raised to HK$9.17, using a 22x 2021E PE. The current price is HK$4.90, which is 11x 2021E PE, below the industry average of 19x PE and 14x for small-mid tier players.

• GFA Expansion: The company is expected to manage 25mn sq m of GFA in 2020E, up from 12mn sq m in 2019. This growth is supported by active expansion through bidding and M&A in the second half of 2020E.

• Growth Engine: VAS is projected to grow at a 134% CAGR to reach RMB343mn in 2020E, driven by accelerated agent business and recovery in advertisement business.

• Shareholding: The major shareholder, Redsun Group, increased its stake to 72.33% after the market close on 21 Dec, showing strong support for the company.

Sector Outlook

• Policy Support: The MOHURD has announced "18 points" to support PM firms merging online and offline services. This is expected to transform service providers into internet traffic entrances, leading to a shift in business models towards service transaction fees.

• Sector Growth: The China Property Service Sector is anticipated to deliver solid earnings growth in 2020E, with positive profit alerts expected in January as short-term catalysts.

• Key Differentiation: The value-added services are seen as the key differentiator for earnings performance in the sector.

Financial Performance (FY18A - FY22E)

Key Ratios

• Gross Margin: Improved from 20.0% in FY18A to 28.6% in FY22E.
• Operating Margin: Increased from 13.0% in FY18A to 19.0% in FY22E.
• Net Margin: Improved from 9.5% in FY18A to 14.0% in FY22E.
• ROE: Expected to rise from 65.8% in FY18A to 25.8% in FY22E.

Valuation & Performance

• Current Valuation: Trading at 11x 2021E PE, which is lower than the industry average of 19x.
• Share Performance:
  • 1-month: -8.8%
  • 3-months: -25.6%
• Market Cap: HK$1,963 million.
• Average 3-month Turnover: HK$3.80 million.
• 52-week High/Low: HK$7.72 / HK$4.15.

Conclusion

The report is bullish on the sector, suggesting that now is the time to accumulate. Redsun Services is positioned to benefit from the growth of VAS, which is expected to become a new growth engine. The revised earnings and improved margins support a re-rating and potential for strong returns.

Analysts

• Bowen Li: (852) 3657 6239 | bowenli@cmbi.com.hk
• Jeffrey Zeng: (852) 3916 3727 | jeffreyzeng@cmbi.com.hk

Disclaimer

This report is for informational purposes only and does not constitute investment advice. The information is subject to change and investors should independently evaluate the recommendations. CMBIS does not assume responsibility for any loss or damage incurred from relying on the information provided.