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Healthy growth prospects pave the way for CG Services

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Country Garden Services Holdings Co Lt (CG Services: 6098) closed at 25.05 Hong Kong dollars (HKD) on October 14. That's more than 100% increase since the company listed on the Hong Kong Stock Exchange at 11.44 HKD per share in June 2018.

Investors who held on to their IPO shares have been richly rewarded.

After some promising gains made in March and April this year, the upward trend consolidated with solid gains from late May all the way through until July.  A brief correction in the first few days of August was quickly reversed with prices accelerating higher once again.  A pause for consolidation during September saw good support established in the HK$22 region.  While above here, we anticipate further gains.

Who is CG Services and what does it do?

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Country Garden Services Holdings Company Limited is an investment holding company that provides property management services to property owners, residents, and property developers in China.

The company mainly provides property management services, community value-added services and non-owner value-added services. Its value-added services include advisory services, as well as clean up, landscaping and maintenance services.

When it listed in June 2018, it became only the fifth major property management company in the Hong Kong exchange after Colour Life, COPL, Greentown Service and A-Living.

According to the China Index Academy, an authoritative industry body for the property management sector in China, CG Services now ranks as a top three property management company in the country.

Strong financials

Based on existing company and analyst reports, it's shown that in the previous year, CG Services (6098) has ramped up its bottom line by 89%, with its latest earnings level surpassing its average level over the last five years.

In terms of revenue-bearing gross floor area (GFA), CG Services' portfolio has reached 123m sqm in 2017, making it also one of the largest property management companies in terms of GFA.

This strong performance generated a robust double-digit return on equity of 28%, which is an optimistic signal for the future.

One analyst commented that "CG Services' ability to maintain an adequate level of cash to meet upcoming liabilities is a good sign for its financial health. This implies that the company manages its cash and cost levels well, which is an important determinant of the company's health."

Noting the health of its balance sheet, analysts believe CG Services has plenty of headroom to grow debt (if required) to fund further expansion later on.

Analyst review: optimistic future outlook

Most market analysts tracking the property management sector in the Asia Pacific region share a positive and healthy outlook for CG Services.

In an industry report released in February this year, a DBS analyst revealed that CG Services ranked among the highest in terms of the overall attributes when evaluated amongst its peers.

"We have ranked the companies under our coverage based on a combination of nine key attributes for property management services and five key factors for value-added services to gauge their overall strengths and competitiveness in this sector," the analyst said.

And based on those parameters, CGS scored the strongest on the property management front.

Even before the company went public, analysts noted that CG Services' profitability in 2017 has far exceeded its peers'. CG Services reported a net profit of RMB402m in 2017, up 23.9% YoY.

One analyst who tracks the property management sector in Hong Kong said, "In fact, if 2017 net profit is considered, CG Services is the most profitable property management company listed in Hong Kong."

Another research firm, which issued a report on CG Services on 30th September 2019 wrote a similarly positive outlook for the company.

The report said: "CG Services (6098) is a financially-sound company with a great history and an optimistic future outlook."

The report highlighted CG Services' exceptional growth potential and solid track record

"Investors in search for stocks with room to flourish should look no further than 6098, with its expected earnings growth of 26%. This growth in the bottom-line is bolstered by an equally impressive top-line expansion over the same period, which is a sustainable driver of high-quality earnings, as opposed to pure cost-cutting activities," the report said.

Industry outlook

Given the size of the China market, a DBS report on the country's property management sector painted a growth sector.

Among the highlights of the report:

Despite its defensive nature, property management industry will see market size double by 2030, creating tremendous growth opportunity

Earnings of leading players under our coverage to grow at a decent average 3-year CAGR of 42%

A defensive industry with market size set to double in the next 15 years. We identified the property management sector as a Recurring, Innovation-driven, Cash-rich and High growth

Given the successful listing of CG Services in Hong Kong, China's property management industry body said: "We believe that with the support of its parent, Country Garden, one of the largest and most aggressive property developers in China, CG Services will continue to remain one of the leaders in the sector."

We believe CG Services is a buy.

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Alex Douglas is managing director of Monex Securities Australia (AFSL: 363 972), part of the Monex Group Inc. Since first plotting currency price charts by hand in 1983, Alex has worked in a range of markets including foreign exchange, futures and equities. Alex is a Certified Financial Technician under the International Federation of Technical Analysts. He also has a Diploma of Technical Analysis from the Australian Technical Analysts Association.
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