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A-Living Services Co., Ltd 3319
June 28, 2018 - 7:37pm EST by
MiamiJoe78
2018 2019
Price: 13.92 EPS 0.50 0.77
Shares Out. (in M): 1,298 P/E 26 18
Market Cap (in $M): 18,064 P/FCF nmf 21.5
Net Debt (in $M): -800 EBIT 895 1,380
TEV (in $M): 17,184 TEV/EBIT 19.2 12.4

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Description

A-Living (3319 HK) is a fast-growing property management (PM) company with a strategic relationship with two large developers (Agile and Greenland) who are committed and incentivized to grow the gross floor area (GFA) managed by the company. The company has ~78M GFA (vs TAM of 19B GFA) under management and expects ~10M GFA from Greenland plus ~7M from Agile, per year through 2022 – enough to support a strong +20% organic growth. Additional growth to come from third-party developers and M&A. The company operates in a fragmented industry that is growing ~6% CAGR and is in the middle of a consolidation; we expect A-living to benefit from these themes as it has ample dry powder (65% of IPO proceed earmarked of M&A). Overall, A-Living should be able to grow EPS by ~40%-50% CAGR through 2021. We think +RMN 1 per share is achievable by 2020; giving us a one-year price target of RMB 20 (40% upside). 
 
Situation Overview:
A-Living is property management (PM) service provider to mid-to-high-end properties in China. The company recently, in Feb-2018, spun-off from Agile Group (3383 HK) and listed on the HKEX. Prior to listing on HKEX, A-Living acquired Greenland Property Services (in June-2017) from Greenland Holdings (600606 CH) who is also a strategic shareholder (23% ownership) of A-Living. A key part of the investment thesis is A-Living’s relationship with large developers, Agile and Greenland. Both developers/parents are important part A- Livings gross floor area (GFA) growth story.
 
Business Overview:
A-Living is a PM service provider to mid-to-high-end properties. The Company has 25 years of experience in PM and currently operates under a dual-brand strategy, Agile Property Management and Greenland Property Services. A-Living has three key revenue streams:
  1. Property management services (~69% of revenue with 27% of gross profit margin): Think security, cleaning, greening, gardening, repair and maintenance, etc. to residential and non-residential properties. 79% of PM revenue in 2017 came from projects developed by Agile Group.
  2. Value-added services ton non-property owners (25% of revenue with 49% of gross profit margin) include sales assistance services, property agency, home inspection services and advertising services.
  3. Value-added services to property owners (6% of revenue with 42% of gross profit margin): This mainly involves property maintenance and repair, decoration and turnkey furnishing services.
Below is a diagram of how they make money:
 
As at FY2017, A-Living provided PM services in 69 cities with a total GFA under management of ~78M sqm and served over 1M million property owners and residents.
 
Growth Driver: Relationship with Agile Group and Greenland to be a key driver of GFA growth. Overall, GFA growth should translate into +50% revenue CAGR from 2018-20 (RMB 8.8B by 2020).  We have A-Living at 200M GFA by 2020.  TAM of ~19B GFA should grow ~6% through the same period.  
  • GFA growth of 15% at Agile and 10% at Greenland in 2019
  • Agile to deliver ~100% of its projects to A-living – this should be ~6-8M GFA per year.
  • Greenland has committed to 7M sqm per year through 2022. Priority on additional 3M sqm GFA per year.
  • 3rd party / M&A to also contribute additional sqm GFA
 
Margins:
- Gross profit margins to be ~30% over the next few years. More M&A will likely dilute gross margins.
- Net profit margins to also be stable in the high teens (~17%) over the next few years.
 
Ownership: The company’s parent, Agile Group, has a controlling ownership with 54% of shares. Greenland Holdings owns 23%. Having a meaningful equity stake, we think these two developers interest will be aligned with A-Listing and minority shareholders. Liquidity might be challenging for large funds; average volume has been ~6M shares.
 
Capital Structure: Strong balance sheet with ~RMB 800M of cash. Most of which is earmarked for M&A.
 
Industry Overview: An overall favorable industry tailwind to support the growth expectations
  • Enjoying a tailwind from urbanization, household formation and population growth in China
  • PM sector is also more stable and sustainable (vs property developers)
  • PM sector GFA is expected to grow ~6% CAGR through 2019. TAM was 18.5B in 2016
  • Very fragmented industry but in the middle of consolidation
  • Top 100 PM companies have 30% market share (vs 13% in 2012).
 
 
Risks:
  • Weaker than expected growth and support from Agile and Greenland
  • Lack of 3rd party GFA wins
  • Higher termination of property management contracts or renewal rate
  • Rising labor cost or subcontract revenue and failure to raise fees to offset cost inflation
  • Regulatory or policy risk on management fees
 
Catalysts:
  • Earnings release
  • Faster than expected growth in GFA under management. Or more than 10M from Greenland
  • Mix shift to higher margin VAS to property owners’ revenue
 
Historical Growth Rates:
 
 
 
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Catalysts:
  • Earnings release
  • Faster than expected growth in GFA under management. Or more than 10M from Greenland
  • Mix shift to higher margin VAS to property owners’ revenue
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