- Longfor has applied to list its property management arm in Hong Kong, following in the footsteps of many of its peers
- The unit, Longfor Intelligent Living, made several acquisitions before filing for the IPO, making it China’s ninth largest player based on area under management
Property developers have been spinning off their real estate management units for several years now, seeking to raise cash and better differentiate the two types of business. One exception has been Longfor Group (0960.HK), a top-10 developer that insisted it had no such plans. But times have changed, and now the company is following its peers by applying to separately list its property management operations in Hong Kong.
On Jan. 7, the company launched a new brand called Longfor Intelligent Living Ltd., which incorporated its smart services and business operations. That same day, the new company filed an IPO application with the Hong Kong Stock Exchange.
Longfor Intelligent Living had around 250 million square meters of property and 1,512 projects under management by Dec. 28, some 80% of that in first- and second-tier cities, according to the prospectus.
In terms of national rank, Country Garden Services (6098.HK), Vanke Service and A-Living Smart City Services(3319.HK) all had 500 million square meters of property under management in 2021. Longfor Intelligent Living squeaked into the top 10 with a ninth-place ranking, according to real estate information provider CRIC Research.
The amount of property under management is directly linked to a management company’s core income, and thus to a large extent can determine its valuation. With that in mind, many companies have resorted to M&A right before their IPOs to expand their scale, and Longfor Intelligent Living is no exception.
Beijing embarked on a strict campaign to deleverage China’s real-estate sector last year, making it harder for companies to access financing for new projects and to pay back short-term debt. In that environment, many spun off their property management arms to raise quick cash. Longfor Intelligent Living had largely steered clear of the acquisitions that many of its peers were making, but then suddenly shifted and went on its own shopping spree.
Last March, it purchased the property management business of Yida China (3639.HK) for 1.27 billion yuan ($200 million). It acquired Kailin Property Management based in Henan province in August, and swallowed part of the property management services of Wharf Holdings (0004.HK) in September. In that process, the company’s portfolio of co-managed property projects leaped 74.9% to 696 from 398 at the end of 2020, its prospectus showed.
Those deals have not only expanded the company’s scope, but also reduced its dependence on its parent. In the first nine months of 2021, revenues from property associated with the Longfor Group and its affiliates totaled 2.33 billion yuan, accounting for only 30% of Longfor Intelligent Living’s total. The remaining 70% came from its business with other developers.
But big spending on acquisitions has weighed on the company’s gross profit margins, which were 29.2%, 25.8% and 27.6%, respectively, in the first nine months of 2019, 2020 and 2021 – a relatively low level when compared with its peers. According to the latest data, it now charges an average of 3.44 yuan per square meter per month for management services for Longfor Group and its affiliates. That was well above the 2.39 yuan per square meter per month it was charging for other developers.
We should point out that while M&A presents expansion opportunities, it also poses risks for property managers. Northeast Securities believes that companies like Sichuan Languang Justbon Services Group and Colour Life Services Group (1778.HK) have seen slowing revenue growth in recent years despite rapid expansion, partly as the result of the low quality of new projects don’t fit well with their original portfolios. Companies also face risk if property owners terminate contracts or if maintenance costs rise too quickly.
Property managers have played a key role in protecting public security and enabling community operations during the Covid-19 pandemic, which also brought opportunities for rolling out new value-added community services. The sector was rewarded with higher market valuations as a result, which reached record highs in 2020. Reflecting that, stocks in the Hang Seng Property Service and Management Index were higher than 60 times at their peaks.
But the group went into a tailspin in the second half of last year after Beijing introduced its latest policies to regulate the market. By the end of last year, the average P/E ratio for the sector had dropped to just 17.5 times, quite low by historical standards. But that average belies big divergences among companies. Big ones tended to secure higher valuations, while smaller ones or ones with limited growth potential got hit the most.
Citic Securities pointed out that the most comparable company for Longfor Intelligent Living is China Resources Mixc Lifestyle Services (1209.HK), since most of their properties and shopping malls under management are concentrated in first- and second-tier cities, and both are trying to coordinate their property management and shopping mall operations.
Longfor Intelligent Living has yet to announce its IPO pricing and valuation. But investors can get some idea using P/E ratios of its peers, including China Resources Mixc Lifestyle Services, which has a relatively high P/E ratio of 57 times, and Country Garden Services and Poly Property Services (6049.HK), which have lower ratios of 32 and 36 times.
The prospectus shows a net profit of 1.13 billion yuan for the company in the first three quarters of last year, translating to around 1.5 billion yuan on an annualized basis. Using an average P/E ratio of around 40 times for the three above-mentioned companies yields a market value of around HK$73.2 billion ($9.4 billion) for Longfor Intelligent Living.
Unlike some of its peers, Longfor Intelligent Living’s parent is in good financial shape, and thus isn’t under pressure to raise large sums to replenish its coffers. Given its flexibility and the strong position of its parent, its valuation could even exceed expectation as it becomes one of the few property management companies to make a new listing in the short-term.