1 Year Holding CC New Life (HKEX: 9983) but still making a loss :(

 

(Transaction made on 15 May 2020, at a price of 8.44 HKD)

The current price as of 2 July 2021 is CC New Life is 7.60.

Compared to my first purchase price, i am actually in a loss 1 year on. In fact the stock has languished at even lower levels throughout the year. However, i remain optimistic of the company.

(Current Price of 7.60 HKD, although it has fallen to a low of 5.76 in the last year)

What resulted in the weak results so far in the year?

1) Initial Hype over property management companies

Companies were trading at close to 40 and 50 PE during the early and mid of 2020. This resulted in a lot of hype. However following the hype, the smaller and mid property management companies tanked following the lack of volume.

2) Too many new listings of Property Management Companies

As a result of this, the exclusivity and uniqueness of companies start to become blurred and funds start to go towards different property management companies. In 2020, at least 14 property management companies have been listed, with larger management companies being listed such as Sunac Services, Evergrande Property Services and China Resources Mixc Lifestyle.

How would i view property management companies 

 I feel that at a PE of 30, its acceptable if the growth year on year is 50% for at least 2 years. 

One might ask how a growth of 50% year on year is possible. The following are some possible reasons off my head.

1) Increased Prices of Property Management Fee

-The current prices vary across different cities in China and varies according to the type and age of residential properties as well. As it is still highly regulated by the governments of each city, a cap is set on the amount that can be charged. Removing this charge will allow for better growth.

2) Increased Economies of Scale

-Managing more properties in the same city with centralized control center will result in better cost savings and economies of scale. For example, using the same maintenance team for more residential projects instead of having 1 for each project will allow for lower cost.

3) Increased Scale of Management

-Revenue = Price x Demand. In this case, increasing demand will be to increase the amount of properties managed to drive growth

4) Increasing Value-added Services

-The profit margin of value-added services are higher than the property management margins. However, different property management companies offer different types of value-added services. The more common value-added services include consultancy services to property developers, real estate services and house-related services.

5) Increased Mix of Properties Managed

-Commercial Properties have a higher management fee charged compared to residential properties and such as have a higher margin. By increasing the amount of commercial properties managed, this would allow for a higher profit.

(Residential Property Management Services Gross Profit Margin of 35.6% is lower than Commercial Property Management Services Gross Profit Margin of 47.2%. However, residential community value-added services have a better gross profit margin of 47.3%)

Conclusion

To sum it up, to drive growth, a good property management company should have a good relative value preposition. 

As there are too many companies in the market currently, one would have to ask if the property management company they have picked provides a good value preposition. 

In picking a big property management company vs a medium/small, one would have to consider that the valuation difference is present and at times the lower liquidity can drive prices to a low such that it does not match the valuation.

Value Prepositions and the relevant companies that I know of.

• Scale ( CG Services Hkex: 6098) The parent company of CG Services is Country Garden Holdings, the largest property developer in China. It has also shown resilience in raising capital as it issued new shares amounting to 4.55% of issued share capital at a price of $75.25 per share in May and the company as of 2 July, trades at $79.95, which is above the issued price.

• Commercial Properties (China Resources Mixc Lifestyle Services Limited Hkex: 1209) 42.7% of Revenue from Commercial Property Management. (KWG Living Group Hkex: 3913) 30% of Revenue from Commercial Property Management. (Sunac Services Hkex: 1516) 29.9% of Revenue from Commercial Property Management. (SCE Commercial Management Hkex: 606) 46.3% of Revenue from Commercial Property Management.

• Service ( Shimao Services Hkex: 0873) Obtained 1st for satisfaction level in Q1 2021.

• Volatility (Evergrande Services Hkex: 6666) High volatility due to parent company Evergrande's ability to service debt in recent times. Evergrande is also the 2nd largest property developer in China.

• 3rd Party Properties being managed ( CC New Life Hkex: 9983) 48% of Managed GFA are 3rd party properties

• Metro Property Management Concept (Yuexiu Services Hkex: 6626) A company largely based in Guangdong, with the Guangdong Government having a stake in the company via its Guangzhou Metro. Provides management services(including sanitary services) for train depots and train services as well as properties owned by Guangzhou Metro that are developed along the metro line.

• Fast Growth Target ( Times Neighborhood Hkex: 9983) Targetted for around 70% core net profit growth in 2021 and around 50% in 2022 and 2023 in a virtual property conference held in June

Lastly, I do apologize for any misspelling or formatting of sentences as this was done while waiting for Euros to begin in the early morning hours.