HONG KONG (Reuters Breakingviews) - Chinese property developers have found a new way to build themselves up. Many are rushing to list management units in Hong Kong. At least 10 have floated this year with two currently selling their shares to investors and six more, including one from Evergrande, in the queue. The asset light businesses offer exposure to China’s property market without the usual policy risk – just as Beijing imposes tough caps on developers’ leverage. It only goes so far to justify managers’ towering valuations.
Managers have steady contracts. Someone needs to take out the trash, whoever built the flat, shops or offices, whether the economy is booming or not. Big early spinouts have performed well. Since $5.8 billion Agile Group listed A-Living Smart Services in February 2018, the manager’s shares have delivered a total return of 300% and its parent a measly 40%. Subtract Agile’s share of A-Living’s larger $6.2 billion market cap from its own value, and the parent’s business is trading on two times its 2021 earnings, per Refinitiv forecasts. A-Living trades on 18 times.
Breakneck growth is attracting big backers to these small units which went mostly unnoticed until their debuts: Private equity group Hillhouse and several hedge funds have taken stakes. Tencent, sensing tech opportunities, has also invested. The scarcity value, though, will fade as more come to market.
A recent float by Shimao Services suggests that the mood is turning cautious. It sold shares in the initial public offering at 27 times expected net profit for 2021, but they have slipped below the offer price. Sunac Services, which is seeking up to $1.1 billion in its IPO, is serving up shares at between 22 and 27 times forecast earnings.
Newness brings another problem: Unpredictability. Sunac’s net profit grew by a compound 151% a year between 2017 and 2019 but its operating margins fluctuate between 5% and 13% while Shimao’s veered between 14% and 20%. Some of the swings are down to the acquisitions managers are making to flatter the top line. Should those falter or pan out badly, these punchy valuations will be hard to justify.
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