20221122-招银国际-China_Project_Management_Sector__Unsustainable_demands_from_LGFVs_but_more_from_defaulted_developers_3页_720kb

China Project Management Sector Summary

Core Content

The China project management sector is experiencing a shift in demand dynamics due to regulatory changes and economic pressures. The cooling land market and restrictions on local government financing vehicles (LGFVs) are leading to a long-term decline in their demand for project management (PJM) services. However, short-term (ST) demand has not dropped sharply, driven by two factors: the large amount of undeveloped land still reserved by LGFVs and their liquidity pressure, which motivates them to seek partnerships with PJM companies. Additionally, there is an increasing demand from defaulted developers as government policies push for the completion of housing delivery targets.

Main Points

• LGFVs Demand Decline:

  • The land transaction volume has dropped after the release of MoF's Paper No. 126 on 8 October, which restricted LGFVs from inflating local financial revenue through land purchases.
  • The unsold land rate in 65 cities rose to 16.3% in October from 9% in September.
  • Several cities, such as Nanjing and Changsha, revoked a significant portion of planned land plots, indicating reduced LGFV activity.
  • As a result, the demand for PJM services from LGFVs is expected to shrink over time.

• Short-Term Demand Stability:

  • ST demand has not declined sharply due to the presence of a large amount of undeveloped land reserved by LGFVs.
  • LGFVs are under liquidity pressure, which is pushing them to monetize land holdings by collaborating with PJM companies.
  • Greentown Mgmt. saw its new contracts value in October fall 5.5% YoY to RMB 590 million, which is still higher than the average of RMB 850 million per month in 3Q22.

• Defaulted Developers as New Demand Source:

  • A series of policies are urging developers to complete housing delivery targets, which has led to increased demand from defaulted developers.
  • Greentown Mgmt. has approximately 10% of new contracts in October 2022 from defaulted developers, including big names such as Auyuan, Sunac, Kaisa, and Zhengrong.
  • These developers are under pressure to deliver housing, which has resulted in increased collaboration with PJM companies.

• Company Performance Forecasts:

  • Greentown Mgmt.:
    • Expected to fully complete its FY22E target of RMB 8.5 billion in new contract value.
    • Projected to deliver 27% YoY growth in net profit (NP) in 2022E.
    • Maintained as a "BUY" due to its diversified demand sources and lower exposure to parent company risks.
  • CCM:
    • Estimated to complete only 51% of its FY22E target due to the impact of its parent company, CCRE, and ongoing issues in Henan.
    • New contracts GFA in FY22E is expected to decline 64% YoY to 3.6 million square meters.
    • Maintained as a "HOLD" due to ongoing liquidity concerns from the parent company.

Key Information

• Greentown Mgmt.:

  • Booked RMB 12 billion in contract sales in October 2022, representing 60% YoY growth.
  • Has a project in Shanghai with a sellable value of RMB 7.3 billion, set to launch in December, which will significantly boost full-year sales.
  • Has a much broader supplier base and lower dependency on parent company ecosystem compared to peers.
  • Only 30% of its projects use PM services from related parties, versus ~95% for CCM.
  • Remains financially stable and all green in three categories, reducing the risk of default.

• CCM:

  • October sales declined 48% YoY to RMB 1.8 billion, and the company completed RMB 17.9 billion in sales for the first ten months of 2022.
  • Still faces challenges due to parent company CCRE's liquidity crisis and ongoing restrictions in Henan.
  • 4Q22E target for new contracts GFA is 7 million square meters, but only 3.6 million is expected to be achieved.

Conclusion

The China project management sector is navigating a complex landscape with declining LGFV demand and increased reliance on defaulted developers. Greentown Mgmt. is positioned better to adapt due to its diversified demand sources and lower exposure to parent company risks, making it a more favorable investment. CCM, on the other hand, is still heavily impacted by its parent company's liquidity issues and local restrictions, leading to a more cautious outlook.

Analysts

• Miao Zhang: (852) 3761 8910 | zhangmiao@cmbi.com.hk
• Jeffrey Zeng: (852) 3916 3727 | jeffreyzeng@cmbi.com.hk
• Bella Li: (852) 3757 6202 | bellali@cmbi.com.hk

CMBIGM Ratings

• BUY: Stock with potential return of over 15% over next 12 months.
• HOLD: Stock with potential return of +15% to -10% over next 12 months.
• OUTPERFORM: Industry expected to outperform the relevant broad market benchmark over next 12 months.

Important Disclosures

• This report is for informational purposes only and should not be considered as investment advice.
• CMBIGM does not provide individually tailored investment recommendations.
• The information is subject to change and is based on analyses of publicly available data.
• CMBIGM is not a registered broker-dealer in the U.S., Singapore, or the U.K. and may have conflicts of interest.
• The report is intended solely for major U.S. institutional investors and may not be distributed to others.
• Recipients should contact CMBIGM directly for any questions or further information.