Kate Lin: Property management company Country Garden Services (06098) is one of the most searched stocks on Morningstar Asia’s websites.
This is timely and revenant at present, as the process of the restructuring of distressed Chinese developers has been making headlines, even as homebuyer sentiment stays subdued.
For companies like Country Garden Services, a fundamental driver of earnings is the consistent expansion of the surface area of home units it manages. Put another way, fewer new residential projects mean lesser new income streams. To combat this, Country Garden Service is venturing into new areas, such as real estate brokerage and grocery purchasing for residents, to diversify its revenue streams.
However, these value-added services have minimal barriers to entry, and come with low switching costs for consumers. Because of this, Morningstar equity analyst Jeff Zhang expects that any positive impact on revenue growth as a result of these additions will moderate over time.
Despite that, our overall outlook for the company is turning positive, as Zhang thinks the worst is over for now. Country Garden Services has streamlined costs to offset wage increases, and concerns about its parent company using it as a financing vehicle are also fading. Most of the short-run negative factors have been reflected in its current share price. The stock is trading with a five-star rating, meaning that it is significantly undervalued.
For Morningstar, I’m Kate Lin.
Bulls Say
- CGS’ top line should rebound strongly in the next few years as the China real estate market recovers and homeowner demand for community VAS resumes.
- Low VAS coverage/GUM suggests high potential to deepen penetration across projects managed by CGS.
- CGS will continue to scale through mergers and acquisitions of smaller peers as well as tender for independent third-party projects, supporting long-run GUM growth.
Bears Say
- Revenue growth of nonproperty owner VAS hinges on residential project delivery, which is vulnerable to real estate market cycles.
- The utility supply business would take a prolonged cycle to improve profitability, and entry by new service providers will dilute overall profit margins.
- Concentration on revenue sourced from CGH projects remains high, exposing CGS to headwinds of slowing housing sales at CGH.
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