20210930-招银国际-碧桂园服务-06098.HK-Acquisition_of_Color_life_s_assets__execution_complexity_with_Wanda_4页_842kb

Summary of CMB International Securities | Equity Research | Company Update

Core Content

This report provides an update on CG Services (6098 HK), a company in the Chinese property services sector, focusing on its recent acquisition of Colour Life Services' core assets for RMB3.3bn. The acquisition is expected to boost CGS's managed GFA and contracted GFA in 2021E by 9% and 5%, respectively, increasing its total managed GFA to 768mn sq m and contracted GFA to 1,429mn sq m (excluding Three supplies). From an earnings perspective, the acquisition would result in a 20% increase in 2020 revenue and a 11% increase in net profit. However, due to limited growth in Colour Life's net profit in 1H21, the 2021E earnings boost is projected to be only 7%.

Main Points

• Acquisition Details:

  • CGS acquired core assets of Colour Life Services, including Wanxiangmei Property (former Wanda PM) and Kaiyuan International.
  • The assets include 65.22mn sq m in managed GFA (41mn sq m residential and 23mn sq m commercial) and 2mn sq m in contracted un-delivered GFA.
  • The transaction is relatively small but brings significant portfolio expansion.

• Challenges and Opportunities:

  • The Wanda commercial assets (23mn sq m) will enhance CGS's presence in the commercial property services sector.
  • However, the commercial operations are still controlled by Wanda, and CGS will only manage the property, which may lead to execution complexity and limit the upside.
  • Link Joy's net margin of 9.7% is lower than CGS's 17%, requiring time to improve profitability.

• Valuation Concerns:

  • The valuation of the acquisition is not considered cheap, as it implies up to 40% premium compared to Colour Life's last trading price.
  • Based on Link Joy's 2020 net profit of RMB309mn, the RMB3.3bn consideration implies an 11x 2020 PE, compared to Colour Life's 6x 2020 PE.

• Current Financial Overview:

  • Revenue has been growing significantly, with a 74.8% increase in FY20A and a projected 45.5% growth in FY21E.
  • Net Profit has also shown consistent growth, with a 68.9% increase in FY20A and a 40.7% growth in FY21E.
  • EPS is expected to reach RMB2.16 in FY21E, up from RMB1.54 in FY20A.
  • P/E and P/B ratios are 31.3 and 28.1, respectively, for FY20A, with projected values of 22.3 and 17.8 for FY21E.

Key Information

• Target Price: HK$91.17, with a 57.1% upside from the current price of HK$58.05.
• Rating: BUY (Maintain)
• Stock Data:
  • Market Cap: HK$186,756mn
  • 52-week High/Low: HK$85.20/HK$41.45
  • Total Issued Shares: 3,217mn
• Shareholding Structure:
  • Chen Chong: 45.1%
  • JPM: 5.7%
  • Free float: 48.7%
• Share Performance:
  • 1-month: -6.3%
  • 3-month: -31.5%
  • 6-month: -26.7%
  • 12-month: +14.7%

Financial Summary

• Income Statement:

  • Revenue has grown consistently over the years, with the highest growth in FY19A at 106.3%.
  • Net profit has also shown steady growth, reaching RMB6,382mn in FY22E.
  • Gross margin and net margin have remained relatively stable, with net margin decreasing slightly to 16.6% in FY21E.

• Balance Sheet:

  • Total assets have increased significantly from RMB5,522mn in FY18A to RMB54,198mn in FY22E.
  • Total liabilities have also grown, reaching RMB29,321mn in FY22E.
  • Equity to shareholders has increased from RMB2,261mn in FY18A to RMB24,877mn in FY22E.

• Cash Flow Summary:

  • Net cash from operating activities has remained positive, with a slight decrease in FY21E.
  • Net cash from investing activities has been negative, indicating capital expenditures.
  • Net cash from financing activities has fluctuated, with a negative value in FY21E.

Key Ratios

• Sales Mix:

  • Basic PM has been the largest contributor to revenue, decreasing from 73.7% in FY18A to 41.3% in FY21E.
  • Community VAS has increased from 8.9% in FY18A to 20.2% in FY21E.

• Profit & Loss Ratios:

  • Gross margin has remained relatively stable, with a slight decrease to 31.7% in FY21E.
  • Net margin has decreased slightly to 16.6% in FY21E.
  • Effective tax rate has fluctuated, with a decrease to 10.0% in FY21E.

• Balance Sheet Ratios:

  • Current ratio has decreased from 1.6 in FY19A to 1.2 in FY21E.
  • ROE has increased from 40.8% in FY18A to 28.0% in FY22E.

Analyst Certification

• The analyst certifies that the views expressed in the report accurately reflect their personal views.
• No part of their compensation is related to the specific views expressed in the report.
• The analyst has not traded in the stocks covered in the report within 30 calendar days prior to the report's release and will not trade within 3 business days after the report's release.

CMBIS Ratings

• BUY: Stock with potential return of over 15% over the next 12 months.
• HOLD: Stock with potential return of +15% to -10% over the next 12 months.
• SELL: Stock with potential loss of over 10% over the next 12 months.
• NOT RATED: Stock is not rated by CMBIS.
• OUTPERFORM: Industry expected to outperform the relevant broad market benchmark.
• MARKET-PERFORM: Industry expected to perform in-line with the relevant broad market benchmark.
• UNDERPERFORM: Industry expected to underperform the relevant broad market benchmark.

Important Disclosures

• The report is not an offer or solicitation to buy or sell any security.
• CMBIS does not provide individually tailored investment advice.
• The report is based on publicly available information and is not guaranteed to be accurate or complete.
• The information is provided for the use of intended recipients only.
• There are risks involved in transacting in any securities, and actual events may differ materially from the report's contents.

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