Investment Summary
On December 14, 2020, the company announced that it intends to acquire 49% of Chengdu Holytech Technology Co., Ltd.'s equity. After the completion of the acquisition, Holytech will become an associated company of the company and be recorded as an investment project of the company. The target acquiring company wholly owns Chengdu Holytech Property Co., Ltd., which provides property management services including residential properties, commercial properties and other types of properties, which include government office buildings, tourist attractions, etc. At the same time, Holytech also provides urban public services, including city appearance and order ancillary management services of Pengzhou City, Sichuan Province of the PRC, etc. The total consideration is approximately RMB 297 million, corresponding to approximately 14x P/E for the company in 2019.
Target company
Chengdu Holytech Property Co., Ltd. was established in 2007 and initially provided property management services for Chengdu Zhixin Industrial Group Co., Limited (Chengdu Zhixin Industrial Group Co., Ltd.). Holytech has been deeply involved in southwestern China and is a leading local enterprise. Project under management covers 18 provinces and cities across the country, totaling 155. GFA under management is about 18.52 million square meters, among which residential properties, commercial properties and other types of properties are GFA under Management calculations accounted for 82.1%, 11.2% and 6.7% respectively. The company currently has 30 projects reserve, with a reserve GFA of approximately 8.18 million square meters, and an average conversion period of 1-2 years.
We believe that through the acquisition of the target company, the company can further expand the company's business scale and market scale in the field of property management services in Southwest China. The target company's project under management is mainly concentrated in the Southwest. According to the geographical distribution of GFA under management, the Southwest, East China, Northwest and Central China account for 83.5%, 9.3%, 4.7% and 2.5% of GFA under management respectively. TIMES NEIGHBORHOOD has been focused on the Greater Bay Area and has begun to expand into different regions in recent years. On June 30, 2020, TIMES NEIGHBORHOOD has a reserve GFA of 1.671 million square meters in the southwest region. After the acquisition, the company can rely on the target company's related parties and its strong external expansion capabilities for the development of the southwest region.
Post-investment management synergy
Holytech's business model is similar to TIMES NEIGHBORHOOD, and after the acquisition, it can produce synergies with it, and further enhance the operating capacity of the target company. In FY18 and FY19, Holytech's net profit margin was 9.97%/10.15%, which was lower than TIMES NEIGHBORHOOD. On the other hand, Holytech has invested less in value-added services, accounting for approximately 6% of its revenue. After the acquisition, TIMES NEIGHBORHOOD can assist the target company in carrying out business activities with higher gross profit margins such as value-added services for owners to increase profitability. After the acquisition, TIMES NEIGHBORHOOD will assign certain persons to Holytech Property Services to serve as senior management personnel of the project company to supervise daily operations and financial work. In addition, the company will also join the board of directors of each target company and project company for further post-investment management.
Valuation and Investment Recommendation
In the second half of the year, valuation adjustments occurred in the property services sector of the Hong Kong stock market. Many property companies are currently trading at an attracting valuation. The company is actively expanding this year and has entered different segments of the industry. This acquisition paves the way for the company's future expansion of business to the southwest region. The business model of the acquired project company is similar to TIMES NEIGHBORHOOD, and it is expected to further improve the operating efficiency of the acquired company after the acquisition. After this acquisition, the company still has ample cash to conduct mergers and acquisitions, providing potential growth room for the future. This acquisition will be recorded as an investment in the company, and further investments in the future can consolidate the company into the financial statement. It is expected that the company's revenue from associates will continue to increase in the future. We expect the company's 2020/2021 earnings per share to be RMB 23.06/43.26 cent, revise up target price to HK$14.91 (previous HK$14.25) corresponding to 58.16x/31.00x expected P/E ratio for 2020 and 2021. Maintain the buy rating.
(Closing price as of 24 Dec)
Risk
1) Post-investment management after M&A is not as expected
Financials
Click Here for PDF format...
