IeQ ]9 %0Qh! +-5 ^SQ6 Initiation of c overage · 2017. 12. 12. · !§_· 'PDÛ l%=° \ IeQ ]9 %0Qh! +-5 ^SQ6 Q *] 9 %0 iU)q 9 hß#û& (28 69 :HK) Market Da ta: 20 , June Closing

Real Estate | Company Research Bringing China to the World

SWS Research Co. Ltd is a subsidiary of Shenwan Hongyuan Securities. 99 East Nanjing Road, Shanghai | +86 21 2329 7818 www.swsresearch.com

21 June 2017

Outperform Initiation of coverage

优质品牌首次覆盖绿城服务给予增持评级

绿城服务集团有限公司 (2869:HK) Market Data: 20, June

Closing Price (HK$) 4.33

Price Target (HK$) 4.90

HSCEI 10,521

HSCCI 4,016

52-week High/Low (HK$) 4.39/1.99

Market Cap (USD Mn) 1,542

Market Cap (HK$ Mn) 12,028

Shares Outstanding (Mn) 2,778

Exchange Rate (RMB-HK$) 1.14

Price Performance Chart:

Source: Bloomberg

Analyst Kris Li A0230511040076 ARG379 [email protected] (+86) 21 2329 7223

Contact Zoe Zhang A0230115080012 BGZ938 [email protected] (+86) 21 2329 7444

Financial summary and valuation 2015 2016 2017E 2018E 2019E

Revenue (Rmb mn) 2,919 3,722 4,884 6,388 8,305

YoY (%) 32% 28% 31% 31% 30%

Net income (Rmb mn) 198 286 397 539 721

YoY (%) 32% 44% 39% 36% 34%

EPS (Rmb) 0.10 0.12 0.14 0.19 0.26

Diluted EPS (Rmb) 0.10 0.12 0.14 0.19 0.26

ROE (%) 132.9% 16.4% 19.6% 22.4% 24.8%

Net Gearing (%) Net cash Net cash Net cash Net cash Net cash

Dividend Yield (%) 3.0% 0.9% 1.1% 1.5% 2.1%

P/E (x) 38 31 26 19 15

P/B (x) 51 5 5 4 4 Core EPS is calculated as if all non-recurring items are excluded. P/E is calculated as closing price divided by each year’s core EPS.

绿城服务集团是中国领先的物业服务供应商，重点定位于高端住宅市场。我们看好公司广受赞誉的品牌影响力和执行力，以及在市场中获取第三方开发商物业项目的核心竞争力。我们预计公司 2017-2019 年每股净利为 0.14 元（同比增长 17%）、0.19 元（同比增长 36%）和 0.26 元（同比增长 37%）。我们给予公司 30 倍 17 年 PE，对应目标价 4.90 港元，考虑到目前股价较目标价存在 13%上升空间，我们首次覆盖绿城服务并给予增持评级。

优质服务保障高额管理费。绿城服务以优质服务而著称，并于 2014-17 年连续获评为“中国物业服务百强满意度领先企业”第一名。基于超出同业平均的客户满意度，公司的物业费收缴率高达 98%，且名义物业管理费单持续上升至 2016 年的 3.08 元/月/平米，仅次于中海物业（2669:HK，买入）的 4.8 元/月/平米，相比行业平均值仅为 2.3 元/月/平米。为进一步提高物业管理费，公司采取的中期策略是积极拓展较高管理费项目，以优化项目组合，例如非住宅比例占总管理面积的比例已经从 2015 年的 17%显著上升至 2016 年的 24%。由此，我们预计公司实际物业管理费将从 2017 年的 2.10 元/月/平米逐步上升至 2019 年的2.35 元/月/平米。

市场扩张彰显核心竞争力。尽管绿城中国（3900:HK，未评级）拥有公司 5%股权且是公司的最大客户，我们更倾向于将绿城服务看作是一家独立物业服务管理公司，因来自绿城中国开发的项目占总管理面积比例仅约为 23%。考虑到公司现有项目续约率和新项目中标率分别高达 97%和 85%，以及公司正布局进入更多城市以及开发存量市场，我们预计公司总管理面积2017-2019年复合增长率可达26%，并于2017年末达1.37亿平米（同比增长30%）、2018 年末达 1.71 亿平米（同比增长 25%）、以及 2019 年末达 2.09 亿平米，相比 2012-2016年复合增长率为 28%。

盈利持续增长可见度高。公司拥有三个互相驱动的业务板块，具体包括物业服务（占 2016年总收入约 70%）、咨询服务（占比 17%）和园区服务（占比 13%），于 2012-2016 年复合增长率分别为 31%、24%和 51%。根据我们预测，我们预计公司总收入 2017-2019 年复合增长率为 31%，与历史增速相一致，其中园区服务占总收入的平均比例将于 2017-2019年提高至 16%。考虑到各个业务板块毛利率不同程度的改善，我们预计公司综合毛利率将从 2016 年的 19.2%提升至 2017 年的 19.7%、2018 年的 20.1%和 2019 年的 20.4%，同期净利率将从 2016 年的 7.7%提升至 2017 年的 8.1%、2018 年的 8.4%和 2019 年的 8.7%。

首次覆盖给予增持评级。公司股价自年初至今已大幅飙涨约 65%，推升其估值高达 26 倍17 年 PE，5 倍 17 年 PB，而可比同业彩生活（1778:HK，买入）和中海物业的估值则分别为 12 倍 17 年 PE 和 17 倍 17 年 PE。我们预计公司净利 2017-2019 年复合增长率为 36%，并于 2017 年末达 3.97 亿元（同比增长 39%）、2018 年末达 5.39 亿元（同比增长 36%）以及 2019 年末达 7.21 亿元（同比增长 34%），同期每股净利分别为 0.14 元（同比增长17%，股份稀释效应）、0.19 元（同比增长 36%）和 0.26 元（同比增长 37%）。我们看好公司广受赞誉的品牌影响力和执行力，以及在市场中获取第三方开发商物业项目的核心竞争力。我们给予公司 30 倍 17 年 PE，对应目标价 4.90 港元，考虑到目前股价较目标价存在 13%上升空间，我们首次覆盖绿城服务并给予增持评级。

The company does not hold any equities or

derivatives of the listed company mentioned

in this report (“target”), but then we shall

provide financial advisory services subject

to the relevant laws and regulations. Any

affiliates of the company may hold equities

of the target, which may exceed 1 percent

of issued shares subject to the relevant

laws and regulations. The company may

also provide investment banking services to

the target. The Company fulfills its duty of

disclosure within its sphere of knowledge.

The clients may contact

[email protected] for relevant

disclosure materials or log into

www.swsresearch.com under disclosure

column for further information. The clients

shall have a comprehensive understanding

of the disclosure and disclaimer upon the

last page.

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Greentown Service HSCEI

October 12, 2010 Building Materials | Company Research

Please refer to the last page for important disclosures Page 1

January 12,2015 Food, Beverage & Tobacco | Company Research

21 June 2017 Real Estate | Company Research

Greentown Service Group is a leading property management services provider in China, mainly targeting the high-end residential market. We favour the firm for its

reputational and competitive advantages in gaining contracts from third-party

developers. We forecast EPS of Rmb0.14 in 17E (+17% YoY), Rmb0.19 in 18E (+36% YoY)

and Rmb0.26 in 19E (+37% YoY). Based on a target PE of 30x 17E PE, we arrive at a

target price of HK$4.90, represents 13% upside. We initiate coverage with an

Outperform rating.

Higher fees. The company recorded a collections rate of 98% and nominal average

monthly management fee of Rmb3.08/sqm in 2016, second only to China Overseas

Property (2669:HK – Buy) (industry average: Rmb2.31/sqm). To boost its average fee,

the firm is emphasising higher-fee non-residential projects, lifting contribution from

these projects 7ppts YoY to 24% of total 2016 contracted gross floor area (GFA). We

forecast average monthly management fee of Rmb2.10/sqm in 17E, rising to

Rmb2.35/sqm by 19E.

Market expansion. Although Greentown China (3900:HK – N-R) holds a 5% interest in

the company, it provided just 23% of Greentown Service’s total contracted GFA in

2016. Given Greentown Service’s high contract renewal rate - 97% - for existing

projects, and its 85% bidding success rate for newly-added projects, as well as its

ambition to enter more city markets and the second-hand market, we forecast total

contracted GFA to grow at a Cagr of 26% from 2016A to 2019E vs a 28% Cagr in

2012-16A, to reach 137msqm in 17E (+30% YoY), 171msqm in 18E (+25% YoY) and

209msqm in 19E (+22% YoY).

Earnings outlook. The company divides its business into three segments, with the

largest contributor, property services (c.70% of total revenue in 16A) growing at a 31%

Cagr in 2012-2016, while consulting services (17%) expanded at a 24% Cagr and

community living services (13%) growing at a compound 51%. We expect total revenue

to rise at a Cagr of 31% in 2017-19E, consistent with historical growth. With each

division improving margins, we forecast a steady increase in overall gross margin from

19.2% in 16A to 20.4% by 19E, and net margin to improve from 7.7% in 16A to 8.7% by

19E.

Initiate at Outperform. We forecasts core earnings to increase at a Cagr of 36% in

2017-19E, with EPS of Rmb0.14 in 17E (+17% YoY, due to share dilution effect),

Rmb0.19 in 18E (+36% YoY) and Rmb0.26 in 19E (+37% YoY). Based on our target PE of

30x 17E PE, we arrive at a target price of HK$4.90. With 13% upside, we initiate

coverage of Greentown Service with an Outperform rating.





Company at a glance

Greentown Service Group listed on the Hong Kong main board on 12 July 2016, with three cornerstone investors (Greentown China, state-owned assets manager China Orient Asset Management and the Zhejiang provincial government asset management firm Zhejiang Silicon Paradise Asset Management), which subscribed to a total 12.7% stake.

On 4 May 2017, Greenwood Asset Management further acquired a total of 10m shares at average price of HK$3.03/shr, a total consideration of HK$30.3m, lifting its stake from 5.0% to 5.3%, becoming the company’s third largest shareholder.

The company was selected as a constituent stock in the Morgan Stanley Capital International (MSCI) China Small Cap Index in November 2016, becoming a constituent of the Hang Seng Composite SmllCap Index (HSSI) in February 2017, and becoming available to northbound trading under the Shenzhen – Hong Kong Stock Connect in March 2017.

Fig 1: Greentown Service cornerstone investors at IPO (mn) Initially offered Actual subscribed

Capital shares before the Global offering 2,000 2,000 Number of Offer Shares under the Global Offering 778 778 -- Number of Hong Kong Offer Shares 78 37 -- Number of International Offer Shares 700 741 Enlarged capital shares after the Global offering 2,778 2,778

Introduced three cornerstone investors at Offer Price of HK$1.99/shr as follows: Number of shares subscribed (mn) % of Offer Shares % of enlarged capital Subscribe amount (HK$ mn)

Greentown China (3900.HK) 139 17.9% 5.0% 277 China Orient AMI 97 12.5% 3.5% 193

Zhejiang Silicon Paradise AM 117 15.0% 4.2% 233

Total 353 45.4% 12.7% 703

Note: Cornerstone investors will not sell their shares subscribed under the relevant underlying Placing Agreement within six months since listing date. Source: Company data, SWS Research

Fig 2: Greentown Service shareholder structure

Source: Company data, SWS Research

Mr. Song Weiping Mr. Shou Bainian Ms. Xia Yibo

Orchid Garden Investment

40% 21%

ChairladyMs. Li Hairong

Mgmt Shareholders

Public Shareholders

Greentown Service Group(2869: HK)

20.28%36.72% 10.80% 26.88%5.32%

Greenwood AM

39%





Greentown Service started providing property management services when established in 1998, and further expanded its business scope to property consulting services in 2000 and community value-added services in 2007.

In addition to providing traditional property management services, the company has explored various value-added services, such as housing replacement services, launched the Smart Community project, and expanded its revenue stream by entering the secondhand market through the Greentown Service Alliance.

Fig 3: Milestones of Greentown Service


As of end-2016, the company managed a total contracted GFA of 105.2msqm (vs 82.8msqm as of end-2015), of which 71.8% was located in the Yangtze River Delta, with the greatest proportion in Hangzhou (c.20%), Ningbo (8.3%) and Yuhang (6.6%).

In terms of revenue, the Yangtze River Delta region accounted for the largest proportion, at 71.5% in 2016, including Hangzhou (26.5%), Ningbo (7.2%) and Yuhang (6.5%), while the Bohai Economic Rim region contributed 13.6% and the Pearl River Delta contributed 5.2%.

The company primarily targets high-end residential projects, accounting for 76.2% of the firm’s total contracted GFA, or 72.3% of total revenue.

1998 2000 2003 2004 2007 2011 2014 2015 2016 2017

Provided property management services

Provided property consulting services

Expended to tier-1 cities in the Yangtze River Delta and Bohai Economic Rim

Provided community value-added services

Awarded the Top100 China Property Management Service Companies during 2011-2017

Lanunched the Smart Community project

Listed on the Main Board of HKExA constituent stock of the MSCI China Small Cap Index, Hang Seng Composite SamllCap Index and Shenzhen- Hong Kong Connect





Fig 4: Geographical presence as of end-2016


Fig 5: Total contracted GFA breakdown by regions, 2016 Fig 6: Revenue breakdown by regions, 2016

Source: Company data, SWS Research Source: Company data, SWS Research

Fig 7: Total contracted GFA breakdown by property types, 2016 Fig 8: Revenue breakdown by property types, 2016


Anhui

Guizhou

Hubei

Jilin

Shandong

Xinjiang

Fujian

Hainan

Hunan

Liaoning

Shanxi

Yunnan

Gansu

Hebei

Inner Mongolia

Ningxia

Sichuan

Zhejiang

Guangdong

Heilongjiang

Jiangsu

Qinghai

Guangxi

Henan

Jiangxi

Shanghai

Tibet

Beijing

Hong Kong

Macau

Tianjin

Chongqing

Shaanxi

Hangzhou (excl. Yuhang)20%

Yuhang7%

Ningbo8%

Yangtze River Delta (excl. Hangzhou and

Ningbo)37%

Bohai Economic Rim11%

Pearl River Delta Business

Region5%

Other Regions12%

Hangzhou (excl. Yuhang)

26%

Yuhang7%

Ningbo7%

Yangtze River Delta (excl. Hanghzou and

Ningbo)31%

Bohai Economic Rim14%

Pearl River Delta Business

Region5%

Other Regions10%

Residential communities, 76.2%

Non-residential properties, 23.8%

Residential communities, 72.3%

Non-residential properties, 27.7%





Financial summary

The company reported total revenue of Rmb3.7bn in 2016, having expanded at a four-year Cagr of 31%. Property services revenue reached Rmb2.6bn after a 31% Cagr, consulting services revenue came to Rmb0.6bn (24% Cagr) and the firm’s “community living services” revenue of Rmb0.5bn (51% Cagr).

Property services accounted for 70.4% of total revenue in 2016, but just 40% of total gross profit, as the business recorded a gross margin of 10.9%, vs 35.5% for consulting services and 43.5% for community living services.

Given a rising contribution to overall gross profit from community services (from 25% in 2015 to 29% in 2016), as well as margin improvements within the property services (+0.7ppts YoY) and consulting services (+1.6ppts YoY) segments, the company’s overall gross margin rose 1.0ppt YoY from 18.2% in 2015 to 19.2% in 2016.

Thanks to effective cost control measures (such as reduced labour cost by employing automated management systems), the company’s net income reached Rmb286m in 2016, bringing its four-year Cagr of 48%, and lifting net margin 0.9ppts YoY from 6.8% in 2015 to 7.7% in 2016.

Fig 9: Revenue breakdown by segments Fig 10: Gross profit breakdown by segments


Fig 11: Gross profit margin by segments Fig 12: Net profit and net margin


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As property management is a labour-intensive activity, the two major factors affecting firms’ total operational costs are staff costs and sub-contracting costs (mainly fees paid to external providers for security, cleaning and maintenance services), which accounted for c.80% of total operational costs in total in 2016.

Therefore, in order to maintain and improve margins, we believe that it is critical for the company to control and reduce labour costs, given steady growth in average minimum wages nationwide (major cities saw wages grow at a Cagr of c.10% in 2006-2016). By introducing automated management systems and employing sub-contracting services, the company reduced the number of employees per m sqm of contracted GFA from 181 in 2015 to a new low of 159 in 2016.

Fig 13: Total operational costs breakdown, 2016 Fig 14: Staff costs and sub-contracting costs


Fig 15: Average monthly minimum wage in major cities Fig 16: Numbers of employees per msqm

Note: Top six regions by average monthly minimum wage are Shenzhen, Shanghai, Tianjing, Guangdong, Beijing and Zhejiang. Source: Wind, SWS Research


Cost of sales91%

Administrative expenses

8%

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Property services

As a high-end property management service provider, the company has, in the past, focused on providing services to newly developed properties rather than existing properties, as newly developed properties typically have better infrastructure, allowing the firm to provide better services to residents and charge relatively higher fees.

Given rising difficulties in gaining contracts with newly developed properties, the company has begun to enter the existing project market and signed secondhand property management contracts in cities such as Shanghai, Hangzhou and Suzhou, which would contribute to both revenue and managed GFA.

Fig 17: Competitive advantages in property services


Fig 18: Revenue model of property services segment


As of end-2016, the company’s total contracted GFA totalled 105.2msqm after growing at a four-year Cagr of 24% between 2012 and 2016, while reserved GFA rose at a four-year Cagr of 28% and reached 119.4msqm, exceeding managed GFA for the third consecutive year, indicating that the firm’s newly-added projects not only replenish the delivered area in the year, but also expanded total reserved GFA.

Average property service fees increased from Rmb3.06/sqm/month in 2015 to Rmb3.08/sqm/month in 2016, against an industry average of Rmb2.31/sqm/month.

The company operates its property services mainly under a lump sum basis for 98% of its total contracted GFA, representing 99.8% of its property services revenue. Under this model, the full quantity of received property management fees and expenses are recognised as revenue and cost of sales, and are borne by the company during the term of the contract. The company’s gross margin is primarily influenced by its bargaining power entering into the contract and thereafter, the company’s performance is based on its cost control ability.

By contrast, properties managed under a commission basis pay a pre-determined percentage (typically 10%) of property management fees, with fees recorded as

Customer satisfaction rate

reach 93%

Collection rate record 98%

Management fees continue to

increase

Contract renewal rate report 97%

Bidding success rate rise to 85%

Steady growth in revenue

Greentown Service Group (2869:HK)

Property owners' association

Property owners

Real estate developers

Preliminary property management agreement

Property management agreement

Property owners' association is authorized to act on behalf of the property owners

Property management fee

Deliver services





revenue, while the remainder is considered working capital used to cover expenses. Hence, gross margin tends to be stable at c.100% as no direct costs are incurred.

Fig 19: Total contracted GFA and reserved GFA Fig 20: Upward trend of property service fee

Source: Company data, SWS Research Note: Average property service fee recorded Rmb3.08/sqm/month in 2016.


Fig 21: Total contracted GFA breakdown by charging methods, 2016 Fig 22: Segment revenue breakdown by charging methods, 2016


Property services revenue came to Rmb2.6bn in 2016, after growing at a four-year Cagr of 31% in 2012-2016. The firm recorded an 85% bidding success rate for its property services business, with a contract renewal rate of 97% and a fee collection rate of 97%, in all cases outperforming the industry average. Meanwhile, property services contributed gross profit of Rmb286m in 2016, representing a four-year Cagr of 51%, while gross margin improved 0.7ppts from 10.2% in 2015 to 10.9% in 2016, mainly due to effective cost control measures.

0

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Total contracted GFA Reserved contracted GFA

('000 sqm)

2.542.69

2.943.06 3.08*

2.122.33

2.632.73

0.0

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All properties Residential properties

(Rmb/sqm/month)

Under lump sum basis, 98%

Under commission basis, 2%

Under lump sum basis, 99.8%

Under commission basis, 0.2%





Fig 23: Property services revenue and growth Fig 24: Property services gross profit and gross profit margin


Consulting services

In 2016, consulting services revenue rose by 12.2% YoY to Rmb618m, representing a slowdown from the Cagr of 24% recorded over the four years to 2016, as its largest revenue contributor – property under construction services (84.5% of segment revenue) – grew just 9.8% YoY to Rmb523m. Management consulting services revenue increased 27.6% YoY in 2016 to Rmb96m, vs a four-year Cagr of 17%.

Within the property under construction services division, the company mainly provides display unit services and construction site security services. Given the strong market recovery seen in 2016 which shortened the development cycle and accelerated the pace of sales, many projects were sold out much earlier than expected, resulting in a total of 201 projects ended in 1H16 and another 159 projects ended in 2H16. Meanwhile, we noted the majority of land auction was won by Top100 developers who prefer to employ their own service divisions, hence leading to the slowdown of business volume. Although the company managed to increase the number of new projects by 14% YoY to 242 at end-2016, average revenue per project declined by 4% YoY to Rmb2.2m, narrowing overall YoY growth to 9.8% YoY in 2016, vs 26% YoY in 2015.

Meanwhile, management consulting services revenue continued to grow in line with historical trends to Rmb96m (+27.6% YoY) in 2016, as the number of managed projects rose by 24% YoY to 210 and average revenue per project increased by 3% YoY to Rmb0.5m.

Fig 25: Consulting services revenue breakdown by value Fig 26: Consulting services revenue breakdown by percentage


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Fig 27: Number of managed projects breakdown by types Fig 28: Average revenue per project breakdown by types


The segment gross profit rose by 17% YoY to Rmb219m in 2016, with property under construction services contributing Rmb157m (+12% YoY) and management consulting services contributing Rmb63m (+33% YoY).

As the contribution from the higher-margin management consulting services (average gross margin of c.64% in 2012-2016 vs c.31% for property under construction services over the same period) increased from 25% of segment gross profit in 2015 to 29% in 2016, overall segment gross margin improved 1.6ppts YoY from 33.9% in 2015 to 35.5% in 2016.

Fig 29: Gross profit breakdown of consulting services Fig 30: Gross profit margins of consulting services


Given rising difficulties of acquiring high-end property contracts from developers other than Greentown China, the company started to expand its revenue stream by entering the existing properties market through its “Greentown Alliance” and “Smart Service” platforms, and we expect strong results from the shift in tack in the second half of this year.

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Fig 31: “Greentown Alliance” and “Smart Service” platforms


Community living services

The company started providing value-added services in 2007 to help improve client loyalty, and launched the “Happy Greentown” mobile application in September 2014 in selected projects to offer a variety of products and services.

In 2016, revenue from the segment rose 75% YoY to Rmb484m, bringing the business’ four-year Cagr to 51%. The largest contributor – “community products & services” (property value management and rental services, among others) – accounted for 63.7% of segment revenue, having almost tripled from Rmb105m in 2015 to Rmb309m in 2016. “Home living services” (ranging from housekeeping and maintenance to entertainment services; 27.8% of segment revenue) declined 7.7% YoY as the company gradually withdrew from hotel accommodation operations, and “community space services” (management of public areas, including advertising; 8.5% of segment revenue) grew by 56.2% YoY due to rapid increase in the number of properties under management.

As the company generates revenue from its value-added services under a commission model, the segment recorded the highest gross margin, of 43.5% in 2016, among the three business divisions. Between 2012 and 2016, the segment gross margin has averaged c.45%.

Greentown Service Group(2869 HK)

Greentown Alliance Smart Service

Members of Alliance

Entrusted corporations

Entrusted propertiesClients from other

property companies

Property owners

Output mgmt Cooperation

Share resources

Develop relationships





Fig 32: Community coverage of community living services Fig 33: Community living services revenue breakdown by value


Fig 34: Gross profit breakdown of community living services Fig 35: Gross profit margins of community living services


Fig 36: Business scope of community living services


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Property value mgmt- House rental- House replacement

Public area mgmt Ad design, production & display

Property repair House keeping Education Entertaiment





Peer comparison

Property management companies with backgrounds in real estate development account for c.80% of the industry. Backed by the resources of developers, these firms are more likely to benefit from stable growth in total contracted GFA given the steady delivery of newly completed properties, along with a solid market reputation.

Parent group-developed properties account for most of the managed GFA for companies with a strong developer background. According to our estimates, they represent 90% of the total contracted GFA of China Overseas Property (2669:HK – Buy) and 95% of that for Vanke Property.

As for Greentown Service, although Greentown China holds a 5% interest in the company and remains its largest customer, we consider the company an independent operator, as Greentown China only contributed 4.7% of the firm’s total revenue, or c.23% of total contracted GFA, in 2016.

By contrast, independent company Colour Life (1778:HK – Buy), with the largest contracted GFA under management in the sector, is expanding its businesses mainly through properties developed by third-party developers. External projects accounting for 98.8% of its contracted GFA as of end-2016 while properties developed by the Fantasia Group (1777:HK – N-R) accounted for just 1.2%. Pure third-party property management company Zhong Ao Home (1538:HK – N-R) acquired c.100% of its projects from external developers in 2016.

Fig 37: Property services revenue contribution from Greentown China Fig 38: Total contracted GFA breakdown by sources


Fig 39: Breakdown of total contracted GFA by sources: group-developed vs externally acquired


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Policymakers relaxed caps on residential property management fees (excluding social housing) was relaxed in December 2014. Nevertheless, raising fees for existing properties is still challenging for property management companies as it requires approval from residents representing over 50% of the project’s total units and over 50% of its total proprietary GFA.

According to the China Index Academy, the average management fee at the top-100 property management companies rose from Rmb2.24/sqm/month in 2015 by c.3% YoY to Rmb2.31/sqm/month in 2016, with fees varying among companies depending on their targeted markets and services provided.

Greentown Service recorded an average management fee of Rmb3.08/sqm/month in 2016, second only to China Overseas Property’s Rmb4.8/sqm/month. We attribute its mild increase from Rmb3.06/sqm/month in 2015 to its fast expansion into cities with lower fees in less affluent areas, with contribution from such operations rising from 26.7% of total revenue in 2015 to 28.5% in 2016.

Meanwhile, Vanke Property management fees average c.Rmb2.5/sqm/month and Zhong Ao Home fees are Rmb1.8/sqm/month. Colour Life books the lowest fees, at c.Rmb1.4/sqm/month, as it mainly targets mid-range properties and has encountered difficulty raising fees in existing properties.

Fig 40: Average management fees of peers

Source: China Index Academy, Company data, SWS Research

We note that property management companies tend to bill the majority of their clients under the lump sum basis, with Greentown Service and Zhong Ao Home recording lump-sum fees for 98% of their respective managed GFAs, while we estimate COPL and Vanke Property charge c.60% of their respective GFA under management on a lump-sum basis. Colour Life, however, manages c.90% of its properties under a commission scheme.

Fig 41: GFA breakdown by charging methods: commission vs lump-sum basis


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Earnings forecast

The company’s reserved GFA reached 119.4msqm in 2016, representing a four-year Cagr of 28% in 2012-2016, whereas the total contracted GFA recorded 105.2msqm with a four-year Cagr of 24% during the same period. Company management guides steady growth in both reserved GFA and total contracted GFA.

As the company intends to enter into more city markets nationwide and has been participating in tenders for existing project property management contracts, we assume a 2017-2019E reserved GFA Cagr of 30%, largely consistent with its historical pace of growth. Meanwhile, given steady delivery from the firm’s reserved GFA, we forecast total contracted GFA to grow at a Cagr of 26%, to reach 137msqm in 17E (+30% YoY), 171msqm in 18E (+25% YoY) and 209msqm in 19E (+22% YoY).

As the company continued to operate its property services mainly under a lump-sum basis, we expect its contribution to remain stable at 98.4% of total contracted GFA in 2017-19E, while leaving commission payments to account for the remaining 1.6%.

In order to lift average property management fees, the company has formulated a medium-term strategy of expanding into higher-fee projects. For example, contribution from non-residential projects, in which the firm can charge higher fees, has risen from 17% of total contracted GFA in 2015 to 24% in 2016.

Hence, we expect the company’s average management fee to increase from Rmb2.10/sqm/month in 2017E to Rmb2.35/sqm/month in 2019E, with lump-sum payments rising from Rmb2.13/sqm/month to Rmb2.38/sqm/month and commission fees rising from Rmb2.62/sqm/month to Rmb2.93/sqm/month.

Fig 42: Actual and estimated total contracted GFA and property management fee, 2012-19E ('000 sqm) 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Reserved contracted GFA 44,900 52,500 67,300 89,100 119,400 161,190 211,159 259,725

% YoY growth

16.9% 28.2% 32.4% 34.0% 35.0% 31.0% 23.0% Total contracted GFA 44,180 54,727 65,889 82,799 105,200 136,760 170,950 208,559

% YoY growth

23.9% 20.4% 25.7% 27.1% 30.0% 25.0% 22.0% Under lump sum basis 43,296 53,851 64,439 81,309 103,517 134,572 168,215 205,222

% YoY growth

24.4% 19.7% 26.2% 27.3% 30.0% 25.0% 22.0% % of total contracted GFA 98.0% 98.4% 97.8% 98.2% 98.4% 98.4% 98.4% 98.4%

Under commission basis 884 876 1,450 1,490 1,683 2,188 2,735 3,337 % YoY growth

-0.9% 65.5% 2.8% 12.9% 30.0% 25.0% 22.0%

% of total contracted GFA 2.0% 1.6% 2.2% 1.8% 1.6% 1.6% 1.6% 1.6% Number of properties 370 460 532 637 809 1,027 1,284 1,593

% YoY growth

24.3% 15.7% 19.7% 27.0% 27% 25% 24% Contracted GFA per property 119 119 124 130 130 133 133 131

Property management fee (Rmb/sqm/month) Average 1.70 1.86 2.05 2.10 2.08 2.10 2.20 2.35

% YoY growth 9.7% 10.2% 2.5% -1.4% 1.2% 4.7% 6.8% Under lump sum basis 1.73 1.89 2.10 2.14 2.10 2.13 2.23 2.38

% YoY growth 9.2% 11.0% 2.1% -1.7% 1.2% 4.7% 6.8% Under commission basis 1.70 2.33 0.93 1.17 2.59 2.62 2.75 2.93

% YoY growth 37.1% -59.9% 25.3% 121.9% 1.2% 4.7% 6.8%






Fig 43: Total contracted GFA and reserved GFA, 2012-19E Fig 44: Property management fee by charging methods, 2012-19E


Based on our contracted GFA and management fees forecasts, we expect property services revenue to grow at a Cagr of 31%, and reach Rmb3.4bn in 17E (+32% YoY), Rmb4.5bn in 18E (+31% YoY) and Rmb5.9bn in 19E (+30% YoY), with contribution from projects managed under the lump-sum basis to remain at 99.8% in 2017-19E, leaving commission payments accounting for the remaining 0.2% in the same period.

Fig 45: Revenue of property services segment Breakdown of segment revenue by value (Rmb mn) 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Under lump sum basis 899 1,221 1,622 2,089 2,615 3,438 4,501 5,864 Under commission basis 2 2 2 2 5 7 9 12 Total of property services 901 1,224 1,624 2,091 2,620 3,445 4,510 5,876

Breakdown of segment revenue by percentage (%) 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Under lump sum basis 99.8% 99.8% 99.9% 99.9% 99.8% 99.8% 99.8% 99.8% Under commission basis 0.2% 0.2% 0.1% 0.1% 0.2% 0.2% 0.2% 0.2% Total of property services 100% 100% 100% 100% 100% 100% 100% 100%

YoY growth of segment revenue 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Under lump sum basis 36% 33% 29% 25% 32% 31% 30% Under commission basis 36% -34% 29% 151% 32% 31% 30% Total of property services 36% 33% 29% 25% 32% 31% 30%


Fig 46: Segment revenue breakdown by value Fig 47: Segment revenue breakdown by percentage


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The company’s consulting services revenue grew at a Cagr of 24% in 2012-16A, with property under construction services accounting for 85% and management consulting services accounting for 15% of segment revenue on average.

Given the shortened development cycle and rising difficulty in gaining contracts from other leading developers, we expect a continued slowdown in business volume from the property under construction services division and assume a Cagr of 12% in 2017-19E, vs a Cagr of 26% in 2012-16A. On the other hand, we expect management consulting service revenue to maintain steady growth in 2017-2019E at Cagr of 30% vs a Cagr of 23% in 2013-16A, on the back of a gradual increase in the number of new projects and average revenue per project.

Therefore, we forecast the segment revenue to grow at a Cagr of 15% in 2017-19E, hitting Rmb717m in 17E (+16% YoY), Rmb826m in 18E (+15% YoY) and Rmb937m in 19E (+13% YoY), with contribution from property under construction services dropping from 85% of segment revenue in 2016A to 78% in 2019E, while that of management consulting services rises from 15% in 2016A to 22% in 2019E.

Fig 48: Revenue of consulting services segment Breakdown of segment revenue by value (Rmbm) 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Property under construction services 209 279 378 476 523 590 661 727 Management consulting services 50 51 62 75 96 126 165 210 Total of consulting services 260 330 439 551 618 717 826 937

Breakdown of segment revenue by percentage (%) 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Property under construction services 81% 84% 86% 86% 85% 82% 80% 78% Management consulting services 19% 16% 14% 14% 15% 18% 20% 22% Total of consulting services 100% 100% 100% 100% 100% 100% 100% 100%

YoY growth of segment revenue 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Property under construction services 33% 36% 26% 10% 13% 12% 10% Management consulting services 2% 20% 22% 28% 32% 31% 27% Total of consulting services 27% 33% 25% 12% 16% 15% 13%




The company’s community living services revenue recorded a four-year Cagr of 51% in 2012-2016, with community products & services accounting for 64% of segment revenue in 2016A, home living services contributing 28% and community space services accounting for the remainder. Community products & services revenue grew at a Cagr of 87% in 2012-16A, against a 24% Cagr for home living services and 40% for community space services.

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Based on historical growth figures, we assume a 3-year Cagr of 57% for community products & services in 2016-19E, 15% for home living services and 30% for community space services. Hence, we arrive at segment revenue forecasts of Rmb722m in 17E (+49% YoY), Rmb1.1bn in 18E (+46% YoY) and Rmb1.5bn in 19E (+42% YoY), with the contribution from community products & services lifting from 64% of segment revenue in 2016A to 80% in 2019E.

Fig 51: Revenue of community living services segment Breakdown of segment revenue by value (Rmb mn) 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Community products and services 25 34 41 105 309 509 799 1,199 Home living services 57 69 85 146 134 157 181 203 Community space services 11 14 16 26 41 55 72 90 Total of community living services 93 117 142 277 484 722 1,052 1,492

Breakdown of segment revenue by percentage (%) 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Community products and services 27% 29% 29% 38% 64% 71% 76% 80% Home living services 62% 59% 60% 53% 28% 22% 17% 14% Community space services 11% 12% 11% 9% 8% 8% 7% 6% Total of community living services 100% 100% 100% 100% 100% 100% 100% 100%

YoY growth of segment revenue 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Community products and services 37% 19% 157% 194% 65% 57% 50% Home living services 20% 22% 72% -8% 17% 15% 12% Community space services 32% 16% 62% 56% 35% 30% 25% Total of community living services 26% 20% 96% 75% 49% 46% 42%




We forecast a total revenue Cagr of 31% in 2017-19E, consistent with historical rates of growth, and expect it to record revenue of Rmb4.9bn in 17E (+31.2% YoY), Rmb6.4bn in 18E (+30.8% YoY) and Rmb8.3bn in 19E (+30.0% YoY).

While property services will continue to account for the largest proportion of total revenue at c.71% in 2017-19E, we expect the contribution from community living services to rise from 13% in 2016 to an average of 16% in the coming three years.

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Fig 54: Total revenue breakdown Breakdown of total revenue by value (Rmb mn) 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Property services 901 1,224 1,624 2,091 2,620 3,445 4,510 5,876 Consulting services 260 330 439 551 618 717 826 937 Community living services 93 117 142 277 484 722 1,052 1,492 Total revenue 1,254 1,672 2,205 2,919 3,722 4,884 6,388 8,305

Breakdown of total revenue by percentage (%) 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Property services 72% 73% 74% 72% 70% 71% 71% 71% Consulting services 21% 20% 20% 19% 17% 15% 13% 11% Community living services 7% 7% 6% 9% 13% 15% 16% 18% Total revenue 100% 100% 100% 100% 100% 100% 100% 100%

YoY growth of total revenue 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Property services 36% 33% 29% 25% 32% 31% 30% Consulting services 27% 33% 25% 12% 16% 15% 13% Community living services 26% 20% 96% 75% 49% 46% 42% Total revenue 33% 32% 32% 28% 31% 31% 30%


Fig 55:Total revenue breakdown by value Fig 56: Total revenue breakdown by percentage


The company’s gross margin steadily improved from 18.2% in 2015 to 19.2% in 2016, with property services gross margin rising 0.7ppts YoY to 10.9% in 2016, consulting services gross margin up 1.6ppts YoY to 35.5% and community living service posting gross margin down 4.0ppts YoY to 43.5%.

Given the firm’s effective cost control measures, we expect property services gross margin to rise from 10.9% in 16A to 12.4% in 19E. Meanwhile, based on our estimation of revenue structure and margin improvement for each division, we forecast the gross margin of consulting services to increase from 35.5% in 2016 to 38.7% in 19E, while that of community living services to drop from 43.5% in 2016 to 40.5% in 19E. As a result, we estimate the overall gross margin to steadily rise from 19.2% in 2016 to 19.7% in 17E, 20.1% in 18E and 20.4% in 19E.

Fig 57: Gross profit and gross margins Gross profit (Rmb mn) 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Property services 55 68 139 213 286 393 537 729 Consulting services 103 120 158 187 219 262 311 363 Community living services 40 54 66 131 211 305 435 604 Total revenue 198 242 363 531 716 960 1,282 1,695

Gross profit margin (%) 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E Property services 6.1% 5.6% 8.6% 10.2% 10.9% 11.4% 11.9% 12.4% Consulting services 39.6% 36.4% 35.9% 33.9% 35.5% 36.5% 37.6% 38.7% Community living services 42.8% 45.8% 46.7% 47.5% 43.5% 42.3% 41.3% 40.5% Total revenue 15.8% 14.5% 16.5% 18.2% 19.2% 19.7% 20.1% 20.4%


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Fig 58: Gross profit breakdown Fig 59: Gross profit margins


On the back of effective cost control measures, we expect net margins to improve from 7.7% in 2016 to 8.1% in 17E, 8.4% in 18E and 8.7% in 19E.

Therefore, we forecast net profit to increase at a three-year Cagr of 36% in 2017-2019E, arriving at Rmb397m in 17E (+39% YoY), Rmb539m in 18E (+36% YoY) and Rmb721m in 19E (+34% YoY), translating into EPS of Rmb0.14 in 17E (+17% YoY), Rmb0.19 in 18E (+36% YoY) and Rmb0.26 in 19E (+37% YoY).

Fig 60: Net profit Fig 61: Gross, operating and net margins


Valuation

The company’s stock price has surged by c.65% YTD, pushing its valuation to a new high of 26x 17E PE and 5x 17E PB, while among peers, Colour Life trades at 12x 17E PE and China Oversea Property stands at 17x 17E PE.

We favour this company for its strong capabilities with well-recognised reputational and competitive advantages in gaining contracts from third-party developers. Based on our target PE of 30x 17E PE, we arrive at a target price of HK$4.90. With 13% upside, we initiate coverage of Greentown Service with an Outperform rating.

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Fig 62: Comparable peers

Company Code Market Cap

Rating Target price PE (x) Dividend

yield Shares Performance

(HK$bn) (HK$) 16E 17E 2015 2016 2017 Greentown Service 2869 HK 12.0 Outperform 4.90 31 26 0.9%

65%

Colour Life Services 1778 HK 4.6 Buy 6.20 15 12 2.0% -2% -13% -22% China Overseas Property 2669 HK 5.0 Buy 2.17 22 17 1.5%

5% 14%

Average

23 18 1.7% -2% -4% 19%

Source: Bloomberg, Company data,SWS Research

Fig 63: Forward PE band chart

Source: Bloomberg, SWS Research

Fig 64: Forward PB chart

Source: Bloomberg, SWS Research

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Appendix 1, Management team

Fig 1: Management team Name Age Position Summary

Li Hairong 59 Chairman,

executive director

Li joined the Group and became the Chairman of Greentown Property Management in Oct 1998. She is responsible for the development strategy and strategic planning of the Group, as well as for marking decisions for material operational matters.

Yang Zhangfa 45 Chief executive officer,

executive director Yang joined the Group in February 2002 and has served in various positions in Greentown Property Management. He is responsible for the overall business operation and daily management of the Group.

Wu Zhihua 38 Chief operating officer,

executive director

Wu joined the Group in June 2003 and worked as the general manager of Zhejiang Greentown Property Community Service Company from February 2013 to September 2013. He is responsible for management work relating to the overall operation of the Group, as well as for management of administration and human resources.

Chen Hao 47 Executive director Chen joined the Group in May 2015 as a vice general manager primarily responsible for the management of community products and services of the Group.

Shou Bainian 63 Non-executive director

Shou became an indirect holder of equity interests in Greentown Property Management in September 2000 and worked as the executive vice chairman and the general manager of Greentown Property Group from April 1998 to March 2015. He is responsible for providing guidance and supervision regarding the business and operation of the Group.

Xia Yibo 54 Non-executive director

Xia became an indirect holder of equity interests in Greentown Property Management in September 2000. She has been serving as the director of Greentown Holdings since September 2002 and is now the chairlady of this company. She is responsible for providing guidance and supervision regarding the business and operation of the Group.

Tian Zaiwei 68 Independent

non-executive director Tian is responsible for supervising and providing independent judgment to the Board. He has been the general manager of Beijing Tianshi Real Estate Development since May 2001.

Poon Chiu Kwok 55 Independent

non-executive director

Poon is responsible for supervising and providing independent judgment to the Board. He has over 25 years of experience in regulatory affairs, corporate finance, listed companies governance and management.

Wong KaYi 42 Independent

non-executive director Wong is responsible for supervising and providing independent judgment to the Board. He currently serves as a director and responsible officer in Fundatech Capital.






Appendix 2, Financial statements

Fig 1: Forecast Income Statement (Rmb mn) 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E

Revenue 1,254 1,672 2,205 2,919 3,722 4,884 6,388 8,305

Cost of Sales (1,056) (1,429) (1,841) (2,388) (3,006) (3,924) (5,106) (6,610)

Gross Profit 198 242 363 531 716 960 1,282 1,695

Other revenue 11 10 12 20 16 31 41 53

Other net income 1 0 0 0 4 2 2 3

Selling and marketing expenses (1) (1) (1) (6) (10) (6) (8) (11)

Administrative expenses (115) (125) (150) (233) (275) (379) (495) (644)

Other operating expenses (12) (16) (24) (29) (35) (49) (63) (82)

Operating profit 82 111 200 284 417 559 758 1,014

Net finance costs (2) (2) (2) (7) (2) (6) (8) (10)

Profit from JCES (1) (0) 0 1 3 3 3 4

Profit before tax 79 108 199 278 419 556 754 1,008

Income tax (20) (26) (49) (76) (124) (151) (204) (273)

Profit for the year 59 83 150 203 295 405 549 735

Non-controlling interests (0) (3) 0 5 9 8 11 14

Profit attr to shareholders 59 86 149 198 286 397 539 721

Dividends paid 0 31 120 230 84 119 162 216

Basic EPS 0.03 0.04 0.07 0.10 0.12 0.14 0.19 0.26

Diluted EPS 0.03 0.04 0.07 0.10 0.12 0.14 0.19 0.26

DPS 0.00 0.02 0.06 0.12 0.04 0.04 0.06 0.08


Fig 2: Forecast Balance Sheet (Rmb mn) 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E

PP&E 33 35 34 64 264 318 404 504

Investment properties 27 26 24 0 0 73 99 133

Interest in associates & JVs 80 106 6 15 127 276 384 522

Others 32 41 170 186 78 119 162 216

Non-current assets 172 208 234 265 470 787 1,049 1,375

Other financial assets 63 100 134 28 0 0 0 0

Inventories 9 11 2 2 10 13 17 22

Trade and other receivables 241 312 438 420 547 882 1,153 1,384

Restricted bank balances 22 29 58 91 115 143 179 224

Cash and cash equivalents 209 299 437 836 2,182 2,224 2,347 2,573

Current assets 544 751 1,068 1,377 2,853 3,262 3,697 4,203

Total assets 715 960 1,302 1,642 3,323 4,049 4,746 5,579

Share capital 50 50 50 0 0 0 0 0

Reserves 79 128 157 132 1,719 1,997 2,374 2,879

Majority interests 129 178 207 132 1,719 1,997 2,374 2,879

Non-controlling interests 13 32 11 17 27 27 27 27

Total equity 142 210 217 149 1,746 2,024 2,401 2,905

Deferred tax liabilities 0 0 0 3 11 1 2 2

Provisions 23 19 14 18 12 39 53 71

Non-current liabilities 23 19 14 21 22 40 54 73

Bank loans 40 40 100 180 0 0 0 0

Receipts in advance 163 231 250 338 473 543 568 577

Trade and other payables 297 395 626 847 943 1,153 1,331 1,500

Current taxation 29 42 72 88 118 199 270 361

Provisions 21 22 23 18 20 90 122 163

Current liabilities 550 731 1,071 1,472 1,555 1,985 2,291 2,601

Total liabilities 573 750 1,085 1,493 1,577 2,025 2,345 2,673

Total equity and liabilities 715 960 1,302 1,642 3,323 4,049 4,746 5,579






Fig 3: Forecast Cash Flow Statement (Rmb mn) 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E

Cash generated from operations 114 193 363 576 474 611 829 1,109

Income tax paid (25) (20) (31) (65) (80) (100) (136) (181)

Net cash generated from operating activities 88 174 333 511 394 511 693 927

Payments for purchase of PP&E (14) (10) (104) (58) (84) (286) (364) (454)

Net proceeds from redemption of other financial assets (63) (37) (39) 111 28

Others (24) (25) (21) 79 (91) (64) (45) (31)

Net cash generated from investing activities (100) (72) (164) 132 (147) (350) (408) (485)

Net borrowing 10 0 60 80 (180)

Net proceeds from IPO 1,266

Interest paid (3) (3) (3) (9) (7)

Dividends payments 0 (29) (86) (265) (22) (119) (162) (216)

Others 7 21 (1) (49) (0)

Net cash generated from financing activities 15 (11) (31) (244) 1,057 (119) (162) (216)

Net increase in cash and cash equivalents 3 91 138 399 1,303 42 123 226

Cash and cash equivalents at beginning of year 206 209 299 437 836 2,182 2,224 2,347

Effect of foreign exchange rate change 0 0 0 (0) 42 0 0 0

Cash and cash equivalents at end of the year 209 299 437 836 2,182 2,224 2,347 2,573






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Introduction of Share Investment Rating Security Investment Rating：

When measuring the difference between the markup of the security and that of the market’s benchmark within six months after the release of this report, we define the terms as follows: Trading BUY: Share price performance is expected to generate more than 20% upside over a 6-month period. BUY: Share price performance is expected to generate more than 20% upside over a 12-month period. Outperform: Share price performance is expected to generate between 10-20% upside over a 12-month period. Hold: Share price performance is expected to generate between 10% downside to 10% upside over a 12-month period. Underperform: Share price performance is expected to generate between 10-20% downside over a 12-month period. SELL: Share price performance is expected to generate more than 20% downside over a 12-month period. Industry Investment Rating: When measuring the difference between the markup of the industry index and that of the market’s benchmark within six months after the release of the report, we define the terms as follows: Overweight：Industry performs better than that of the whole market；

Equal weight： Industry performs about the same as that of the whole market；

Underweight：Industry performs worse than that of the whole market.

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Documents

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