CGS Near-Term GUM Run Rate Intact, Concerns on Risk as Financing Vehicle Overdone

We continue to like Country Garden Services, or CGS as the preferred pick among China property management companies, or PMCs, amid the backdrop of a weak physical market that may cast doubt on the gross floor area under management, or GUM, growth in the sector. Also, there is renewed market fear of heightened risk for PMCs being viewed as financing vehicles for the developers, which adds to the share price pressure on the listed PMCs. We think these concerns for CGS as overdone, which provides a decent entry point for the shares at the current level and the shares are undervalued. The company reiterates GFA deliveries progress from its sister developer Country Garden Holdings, or CGH, for the next two years remain intact, and the company’s recent commitment to steer away from significant related party transactions with the sister developer as well as a moratorium on further share placement and controlling shareholder share sales should bring some comfort over investors' main concerns that are shrouding the sector currently. While we raise our earnings estimates for 2022 and 2023 by 10% and 7% respectively, after incorporating the contributions from recent mergers and acquisitions, we reduce our fair value estimate to HKD 85 from HKD 88 per share after lowering the incremental GUM per year (excluding M&As) to about 100 million square meters per-year run-rate. Despite the company’s sector leading M&A progress amid the consolidation environment, we believe M&A deals are highly competitive in the sector and hence our no moat rating is unchanged. Nonetheless, while the operations of PMCs including CGS are stable, the company’s share price performance is susceptible to its sister developer’s updates, which may be a risk to watch for in terms of near-term volatility for the stock.