Property developers have been filming their property management units for several years, seeking to raise funds and better differentiate between the two types of activity. One exception was Longfor Group (OTCPK:LGFRY) (0960.HK), a top 10 developer who insisted it had no such plans. But times have changed, and now the company is following its peers in asking to list its Hong Kong property management operations separately.
On January 7, the company launched a new brand called Longfor Intelligent Living Ltd., which integrated its intelligent services and business operations. On the same day, the new company filed an IPO application with the Hong Kong Stock Exchange.
Longfor Intelligent Living had about 250 million square meters of properties and 1,512 projects under management as of Dec. 28, about 80 percent of them in first- and second-tier cities, according to the prospectus.
In terms of national ranking, Country Garden Services (6098.HK), Vanke Service and A-Living Smart City Services (3319.HK) all had 500 million square meters of properties under management in 2021. Longfor Intelligent Living rose in the top 10 with a ninth place finish, according to real estate information provider CRIC Research.
The amount of assets under management is directly linked to the income base of a management company and can therefore to a large extent determine its valuation. With this in mind, many companies resorted to mergers and acquisitions right before their IPO to expand their scale, and Longfor Intelligent Living is no exception.
Last year, Beijing launched a tough campaign to deleverage China’s real estate sector, making it harder for companies to access financing for new projects and repay short-term debt. In this environment, many have given up their property management arms to raise funds quickly. Longfor Intelligent Living had largely avoided the acquisitions that many of its peers were doing, but suddenly changed and went on its own shopping spree.
Last March, it bought the property management business of Yida China (3639.HK) for 1.27 billion yuan ($200 million). It acquired Henan province-based Kailin Property Management in August and swallowed up part of the property management services of Wharf Holdings (0004.HK) in September. In that process, the company’s portfolio of co-managed real estate projects jumped 74.9% to 696 from 398 at the end of 2020, according to its prospectus.
These agreements not only widened the scope of the company, but also reduced its dependence on its parent company. In the first nine months of 2021, revenue from properties associated with Longfor Group and its subsidiaries totaled 2.33 billion yuan, which is only 30% of Longfor Intelligent Living’s total. The remaining 70% came from his activities with other developers.
But heavy spending on acquisitions weighed on the company’s gross profit margins, which were 29.2%, 25.8% and 27.6%, respectively, in the first nine months of 2019, 2020 and 2021 – a relatively low level compared to its peers. According to the latest data, it now charges an average of 3.44 yuan per square meter per month for management services for Longfor Group and its subsidiaries. This was well above the 2.39 yuan per square meter per month it charged other developers.
It should be emphasized that while mergers and acquisitions present opportunities for expansion, they also present risks for property managers. Northeast Securities believes that companies such as Sichuan Languang Justbon Services Group and Color Life Services Group (1778.HK) have seen slower revenue growth in recent years despite rapid expansion, in part due to low quality of new projects that do not fit well with their original portfolios. Businesses are also at risk if landlords terminate their contracts or if maintenance costs rise too quickly.
Social guard dogs
Property managers have played a key role in protecting public safety and activating community operations during the Covid-19 pandemic, which has also provided opportunities for the deployment of new value-added community services. As a result, the sector was rewarded with higher stock market valuations, which reached record highs in 2020. As a result, stocks in the Hang Seng Property Service and Management Index were more than 60 times higher than their highs.
But the group went into freefall in the second half of last year after Beijing introduced its latest policies to regulate the market. By the end of last year, the sector’s average P/E ratio had fallen to just 17.5x, which is quite low by historical standards. But this average belies large differences between companies. The big ones tended to get higher valuations, while the smaller ones or those with limited growth potential were the hardest hit.
Citic Securities pointed out that the most comparable company for Longfor Intelligent Living is China Resources Mixc Lifestyle Services (1209.HK), as most of their properties and malls under management are concentrated in first- and second-tier cities, and the two are trying to coordinate their property management and shopping center operations.
Longfor Intelligent Living has yet to announce the price and valuation of its IPO. But investors can get an idea using the P/E ratios of its peers, including China Resources Mixc Lifestyle Services, which has a relatively high P/E ratio of 57 times, and Country Garden Services and Poly Property Services (6049 .HK), which have lower ratios of 32 and 36 times.
The prospectus shows net profit of 1.13 billion yuan for the company in the first three quarters of last year, which translates to about 1.5 billion yuan on an annualized basis. Using an average P/E ratio of around 40 times for the three aforementioned companies yields a market value of around HK$73.2 billion ($9.4 billion) for Longfor Intelligent Living.
Unlike some of its peers, the parent company of Longfor Intelligent Living is in good financial shape and therefore not under pressure to raise large sums to replenish its coffers. Given its flexibility and the strong position of its parent company, its valuation could even exceed expectations as it becomes one of the few property management companies to make a new listing in the short term.