Global Research27June2019研报客www.yanbaoke.comInitiation of CoverageChina Property ManagementEquitiesPotential to become integrated service providersChinaReal EstateJohn Lam,CFAOpportunity to become integrated service providersAnalystWe initiate coverage of the China Property Management's sector with a positive view.john-za.lam@ubs.comWe like its secular growth,light-asset business model,low policy risk,and the+852-29716358consolidation at both managers'and developers'levels,leading to 26%2018-21E EPSMark LeungCAGR for our coverage.Comparison with global peers implies Chinese managers mayAnalysthave an opportunity to become integrated service providers,which we think is not yetmark.leung@ubs.compriced in.Here,we compare global peers'business models,analyse project age to+852-29718636gauge the future margin trend,and project density at city level to gauge the probabilityMichael Xuof developing the value-added services.Our top pick is A-Living due to attractiveAnalystvaluations on"clean"earnings basis after stripping off its agency business(connected-michael-a.xu@ubs.comparty transactions)and M&A (which investors do not like).Our least-preferred stock is+852-29715573China Overseas Property Holdings (COPH),as we expect downside risk to consensusCindy Chenearnings estimates.We expect the catalysts are the H119 positive profit alerts in July.Associate Analystcindy-zb.chen@ubs.comWill the management company be hurt by a margin squeeze?+852-29718396We think the margin will remain stable at least for the next three years (2019-21),asAlex Kramm,CFAthe addition of new projects,where the margin is higher,offsets the falling margin ofAnalystthe existing projects,due to strong GFA growth (27%CAGR in 2018-21E).Our projectalex.kramm@ubs.comage analysis suggests Greentown Service,COPH,and Colour Life have less margin+1-212-7134060downside risk as their projects are older.John GoodeAssociate AnalystLessons learned from global peersjohn.goode@ubs.comWe think property management companies have an edge in providing property-related+1-212.7139413services (e.g.brokerage,decoration)as they have information advantages and physicalaccess to property owners.For their global peers in property management sector,management fee revenue means about 50%of total revenue for residential-focusedpeers,e.g.FirstService,but less than 30%of total revenue for commercial-focusedpeers,e.g.CBRE and JLL.Service quality and project density at city level are importantto driving the value-added services.We see Greentown Service has both elements.Valuation:sector trading at 23.4x 12-month forward PEOur covered universe is trading at 23.4x 12-month forward PE with about 26%EPSCAGR in 2018-21E.We think the market has priced in the organic EPS growth,butprobably not the potential upside from becoming an integrated service provider.Figure 1:China property management sector coverage universe and preferencesMarket cap3M ADTVRating Stock pricePT2018-21ECompanyStock code(US$bn)(US$m)(HKS)(HKS)Upside%19E PE 20E PEEPS CAGRMostA-Living3319.HK2.34.1Buy13.3815.6017%15.111.527%preferredGreentown Service2869.HK2.34.3Buy6.408.0025%28.921.428%Colour Life1778.HK0.92.2Buy5.396.3017%10.59.017%LeastCG Services6098.HK5.712.7Neutral17.9618.704%34.126.428%preferredCOPH2669.HK1.84.3Sell4.272.70-37%29.223.522%Weighted Average5%27.521.326%Note:Price data as of 25 June 2019.Source:UBS estimateswww.ubs.com/investmentresearchThis report has been prepared by UBS Securities Asia Limited.ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGINON PAGE 91.UBS does and seeks to do business with companies covered in its research reports.As a result,investors should be awarethat the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only asingle factor in making their investment decision.研报客www.yanbaoke.comContentsJohn Lam,CFAAnalystjohn-za.lam@ubs.com+852-29716358STOCK PICKS......6Mark LeungAnalystPIVOTAL QUESTIONS.........mark.leung@ubs.com+852-29718636Q:Will rising labour costs (accounts for about 60%of COGS)result inMichael Xumargin pressure?.10Analystmichael-a.xu@ubs.comQ:Will global model of integrated service provider be adopted in China to+852-29715573drive growth?.14Cindy ChenAssociate AnalystWHAT'S PRICED IN7.…cindy-zb.chen@ubs.com+852-29718396CHINA PROPERTY MANAGEMENT PRIMER...23Alex Kramm,CFAAnalystalex.kramm@ubs.com+1-212-7134060Country Garden Services...............31John GoodeGreentown Service Group............43Associate Analystjchn.goode@ubs.com+1-212-7139413A-Living Services.54China Overseas Property Holdings67Colour Life Services.........78Initiation of Coverage:China Property Management 27 June 2019研报客www.yanbaoke.comChina Property ManagementUBS Research THESIS MAP a guide to our thinking and what's where in this reportOUR THESIS IN PICTURES-MOST FAVOUREDLEAST FAVOUREDA-LivingCOPHPIVOTAL QUESTIONSQ:Will rising labour costs (accounts for about 60%of COGS)result in margin pressure?Not in the next three years,due to strong GFA growth from new projects.We think the margin ofexisting projects is falling as it is difficult for management companies to raise fees (as it requires morethan 50%of property owners to approve),but labour cost has been rising by 5-8%per annum.However,the new projects margin is much higher than existing projects due to higher managementfees and lower occupancy rate (i.e.lower maintenance cost).With strong GFA growth from newprojects addition,we think the margin will remain stable in the next three years.However,marginmay decline when growth slows,which may happen after five years,in our view.moreQ:Will global model of integrated service providers be adopted in China to drive growth?Yes.From the global peers'development history,we see three ways to expand:1)expand their non-management business (e.g.value-added services);2)expand to non-residential property;and3)expand globally.Looking at JLL and CBRE for commercial property,and FirstService for residentialproperty,we see Chinese management companies'non-management fees business (i.e.value-addedservices)may bring more than 50%of their future revenue.Chinese peers are increasing scale andproject density in cities so that it is scalable to launch their value-added services.What we arelooking at are overall GFA scale,city level project density,and expansion to non-residential property.mWHAT'S PRICED IN?Our covered universe is trading at 23.4x 12-month forward eamings,with 26%EPS 2018-21ECAGR.We think the positives about its strong earnings growth,recurring revenue,light asset nature,lower policy risk,and consolidation story are largely priced in.However,we think the potential upside fromvalue-added service is not priced in as we see consensus EPS CAGR in 2018-21E is largely driven by theGFA growth (which is highly certain)instead of growth from the value-added services segment.UBS VIEWPotential upside from value-added services not priced in:We think the management companieshave an edge in providing the value-added services,especially the property-related services,e.g.property transaction,leasing,decoration,cleaning services,with an edge in information advantage andunique offline access to owners.To monetize their edge,we think service quality and project density atcity level are important,and,in our covered universe,we see Greentown Service has both elements.EVIDENCEOur project age,project density analysis,and collaboration with US analysts and review ofthe global peers'business model:Our project age analysis suggests most managers'margins willremain stable in the next three years due to strong GFA growth,whilst COPH and Colour Life may havelower margin downside in the long run.Our analysis of project density at city levels suggests GreentownService has the highest density to provide its value-added services.Our collaboration with our US analysts,and comparison of global peers business model,suggests the roadmap for Chinese companies'non-management fees business(i.e.value-added services)may be about 50%of their revenue in the future,and the area of growth can come from 1)expansion of their non-management business (e.g.value-addedservices),2)expansion to non-residential property,and 3)global expansion.Non-property management revenue100%90%80%74%(ma70%residentialFrom the global peers'business models,we think the60%roadmap for Chinese companies'strategy could be to:50%1)expand their non-management business (e.g.value-43%added services);2)expand to non-residential property;and40%Property3)expand globally30%management20%om pany10%0%Initiation of Coverage:China Property Management 27 June 2019研报客www.yanbaoke.comChina Property ManagementUBS ResearchOUR THESIS IN PICTURES40%Top 10 property management companies35%market share30%Top 10 property developersWe see strong consolidation potential as the market25%market share is 30%in 2018share of the top 10 property management companies20%(PMC)is only 11.4%(in terms of GFA undermanagement),compared with a 30%market share for15%10.2%11.1%11.4%the top 10 developers.FirstService,the largest US10%6.2%7.6%residential property management company,has a 6%4.9%market share in US5%2.9%0%2012201320142015201620172018Revenue-bearing GFA600500We expect 27%CAGR GFA in 2018-21E for our coveredmanagement companies due to project delivery ofparent developers and expansion into third-partydevelopers'areaCGSNote:The CAGR shown in the chart above represents 2018-21E CAGR.%of new%of new projects (s3 years)vs 2018 GP marginprojects2018 GPM80%30%Companies with more newly completed projects tend to60%26%have higher margins,i.e.their margin may be subject to25%more downside risk when their GFA growth slows20%40%15%15%●11%20%9%10%(Note:GP margin is taken for GPM for property management only,andalso we have excluded both revenue and gross profit contribution from5%66%commission basis,i.e.,we only compare the GPM for lump-sum basis,so62%53%42%41%0%0%A-LivingCOPHInitiation of Coverage:China Property Management 27 June 2019研报客www.yanbaoke.comNumber of projects of cty which they have highestnumber of projects in their portfolio350330300250192200Greentown Service has the highest city level projectdensity,which is positive to its value-added service150140100business1007350HangzhouShanghaiLanzhouFoshanBeijingGreentownA-LivingCGSCOPH2018 revenue from VAS to property owners(Rmb/sqm)revenue-bearing GFA107.76Greentown Service has the highest value-added service3.1revenue per unit of GFA2.31.71.10GreentownA-LivingCountryChinaColour LifeServicesPropertyThe sector is trading at 23.4x on 12-month forward PESources for the exhibits above:China Index Academy,Company data.Thomson Reuters,UBS estimatesInitiation of Coverage:China Property Management 27 June 2019