Losses in O2O have been minimized. China and Austria have invested 58.2 million yuan to build their O2O platform in the past, but Luo Tao, CEO of O2O, tendered his resignation in April this year because the O2O business did not meet expectations. Since then, in order to save maintenance and operating costs, the company has signed a service agreement with Luo Tao and Chuangnian Network Technology, paying RMB 100000 per month for the maintenance and operation of Aijia O2O platform. The company believes that the loss of the O2O business has been kept to a minimum. We expect the loss of O2O business to be controlled at 10 million yuan and 5 million yuan in 2017 and 2018.
Focus on post-acquisition business integration. After acquiring two property management companies in 2016, China and Austria will focus on integrating the acquired businesses. According to the company's announcement on June 30, 2017, the net profit of the acquired company Yongcheng property reached 32.2 million yuan in 2016, and the area under management of Yongcheng property was 21.6 million square meters at the end of 2016, accounting for 36% of the total management area of China and Austria. As a result, China and Austria acquired a 7.5 per cent stake in the company with an additional investment of 22.5 million yuan in accordance with the previous agreement. Upon completion of the acquisition, China Austria will hold a 77.5 per cent stake in Yongcheng property.
In the future, China and Austria will continue to integrate the businesses of the two companies acquired and increase their shareholdings in accordance with the acquisition agreement.
Strive to increase market share. Compared with acquiring new business through acquisition, China and Austria will focus more on the endogenous development of business in the future. The new projects in China and Austria mainly come from developers (newly built houses) and community owners (completed houses). The company will actively strive for any completed residential projects that are profitable and charge about 1.5 yuan per square meter per month, and strive to increase market share. By the end of 2016, the company has managed 445 parks with a management area of about 60 million square meters, of which 44.6 million square meters have been delivered under management, and another 15.4 million square meters of properties will be delivered in or after 2017.
Turn losses into profits in 2017. After the company controls the losses in the O2O business, we believe that China and Austria will turn losses into profits in 2017. Although we have adjusted the company's profit forecast, we believe that the upward profit risk still exists. In addition, the company's cash and total loans at the end of 2016 were 442 million yuan and 129 million yuan respectively, equivalent to 0.394 yuan or HK $0.45 per share in net cash. The company is currently valued at 7.4 times 2017 or 5.6 times forecast earnings in 2018, lower than the industry average of 16.6 times / 12.8 times for the same period. Based on 10 times forecast 2017 earnings, we lowered our original target price by HK $1.33 to HK $1.13. The potential increase was 36.1%, and the rating was upgraded from "hold" to "buy".
The main risks are: (1) the stock trading is not active; (2) the fierce competition in the property management industry leads to a decline in profits.