One too many China property management IPOs?

Hong Kong

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 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 the US$5.8 billion Agile Group listed A-Living Smart Services in February 2018, the manager's shares have delivered a total return of 300 per cent and its parent, a measly 40 per cent.

Breakneck growth

Subtract Agile's share of A-Living's larger US$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 US$1.1 billion in its initial public offering (IPO), is serving up shares at between 22 and 27 times forecast earnings.

Unpredictability

Newness brings another problem: Unpredictability. Sunac's net profit grew by a compound 151 per cent a year between 2017 and 2019, but its operating margins fluctuate between 5 per cent and 13 per cent; Shimao's veered between 14 per cent and 20 per cent.

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.

On Twitter, Chinese property manager Sunac Services on Nov 6 launched an IPO seeking to raise up to US$1.1 billion in Hong Kong, a day after rival KWG Living kicked off another deal seeking up to US$800 million.

At least 12 real estate developers have floated their property management units in Hong Kong in the past 12 months. Two, including Sunac, are now marketing their shares to investors and another six, including Evergrande, have filed applications to list with the Hong Kong exchange. REUTERS