- May 24, 2021
Property Developers have created a new sector through property management subsidiary spin-offs in recent years, and we believe there are more to come. As equity valuations of developers remain depressed and government tightens regulation on financial leverage, further spin-offs of other business units will be the main fuel to propel developers’ future growth, in our view.
Key Highlights:
- As government tightens regulation on developers’ financial leverage and profit margins contained by ASP pre-sale restriction, we believe developers will be actively seeking alternative equity funding channels to fuel growth.
- Spin-off of property management companies opened up a new sector of opportunities for investors and we believe that there is more to come. Over the past 5 years, property developers have already began to develop non-property related business opportunities that arose around their core business, laying down the foundation for the next decade.
- We have seen “other revenues” grow by 29% CAGR from 2018 to 2020 across the sector and we believe that these business units are entering maturity and could be ready for a separate listing over the next 5 years.
- The regulation of developers’ leverage through the Three Red-Lines and limiting foreign debt through NDRC quota will restrict the industry’s top-line contracted sales growth in our view.
- We initiate Coverage of Yuexiu Prop, Radiance, SINIC, Dexin China and Yincheng LS
- Top Picks among Property Management Companies: Aoyuan Healthy Life (3662.HK) and Central China New Life (9983.HK)
- Top Picks among Developers/Landlords: Yuexiu Property (123.HK), Yuexiu REIT (405.HK), Aoyuan (3883.HK)
- We remain positive on the China Property USD Bonds overall. We believe the developers have shown their discipline in CAPEX, generating positive Free Cash Flow, while the enforced growth slowdown by regulation and potential spin-offs to recapitalize balance sheets will continue to be credit positive.
