Company Overview
Aoyuan Health Life (“Aoyuan Life”) is one of the providers of property management services and commercial operation services in China. Aoyuan Life was spun off from China's Aoyuan (3883 HK, purchase rating, target price: HK$9.8). China Aoyuan holds 75.5% of Aoyuan's interest. After the spin-off and listing is completed, Aoyuan's interest will be reduced to 56.6%, but Aoyuan will remain a subsidiary of China Aoyuan.
As of September 2018, the company's management area was about 10 million square meters, and the area obtained from properties developed by Aoyuan Group (including related parties and joint ventures) accounted for about 95%.
The property management services provided by Aoyuan Life are broadly divided into three categories: 1) developers, mainly Aoyuan in China, provides sales support services such as maintenance of model houses and sales centers; 2) General property management services, such as security, cleaning, etc., which are the company's biggest revenue source. Segment revenue for the first three quarters of 2018 was 220 million yuan (RMB · same below, except as specified), accounting for about 50% of total revenue; 3) value-added services, such as local management of public homes, rental advertising space, home assistance services, etc.
In addition, Olympic Life will also provide commercial operation services to manage some of its shopping malls. Services include: 1) guidance to mall developers (mainly Aoyuan, China) or owners on how to operate; 2) investment promotion work; 3) general property management services such as security, cleaning, maintenance and maintenance services; 4) troublesome work such as rent collection and complaint handling; 5) other value-added services such as parking management. The segment's revenue for the first three quarters of 2018 was 120 million yuan, accounting for about 27% of total revenue.
In addition to housing and shopping mall management, Olympic Life is also developing and providing diversified services to find business opportunities in the consumer ecosystem of the Group's households. For example, Olympic Life signed a strategic cooperation agreement with the Korean “PPEUM” brand to help develop the aesthetic medicine clinic business; in addition, it also signed strategic cooperation agreements with “Dr. Chunyu” and “Health 160” to access online medical consultation services through the O2O platform.
Status and prospects of the industry
Aoyuan Group is deeply rooted in South China. Among them, the Guangdong-Hong Kong-Macao Greater Bay Area has a land storage area of about 7.4 million square meters, accounting for about a quarter of Aoyuan's total land storage. The “Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area” recently issued by the State Council emphasizes strengthening urban connectivity within the region, speeding up infrastructure investment such as the Shenzhen-China Corridor, the Shenmao Railway, etc., which will benefit the development of the Shenzhen region in the long term. It is beneficial to the development of the Greater Bay Area and surrounding radiation areas in the long run. Guangdong Province's total commercial housing sales in 2018 exceeded 1.8 trillion yuan, accounting for 12% of the country's highest in the country, while Guangdong Province also ranked first in the country in terms of total GDP. In 2018, the province's gross domestic product was about 9.730 billion yuan. A deep economic foundation, combined with policy support, is beneficial to the Group's development.
The development of the Chinese housing market has gradually matured over the years. In 2018, commercial housing sales exceeded 1.7 billion square meters. After years of accumulation, the property management industry will enter a golden period. According to the China Index Institute report, the size of the national property management industry is expected to reach 24.3 billion square meters in 2020. With industry integration, the stronger the stronger the stronger it became a major trend. In 2018, the sales (full caliber) of the top 100 housing enterprises was about 11.2 trillion yuan, accounting for about 74% of the country's total sales. However, although the downstream property management industry has the same trend of integration, it is still scattered. The market share of the top 100 property management companies is only about 30%, and industry leaders are expected to benefit from the integration dividends.
Consumption continued to grow at a high rate under the general trend of income improvement and wealth effects. Total retail sales of social consumer goods increased from 2012 to about 381,000 billion yuan in 2018 at a compound annual growth rate of 9%. Retail spending in shopping malls is also increasing, and the commercial operation service industry is expanding rapidly. Retail spending in shopping malls in China increased from 2012 to around RMB 1,645.4 billion in 2017 at a compound annual growth rate of 8.1%.
Advantages and opportunities
As a subsidiary of Aoyuan in China, Aoyuan Life not only shared the brand effect and popularity of Aoyuan Group, but also benefited from the business partnership with the parent company. As of June 2018, China's Aoyuan had a total land storage area of over 30 million square meters, mainly distributed in South China, Central and Western China, East China and the Bohai Rim region. China Aoyuan's sales increased 100% year-on-year to 91.3 billion yuan in 2018, ranking 38th in the country. Aoyuan's sales value in 2019 was about 190 billion yuan. It is conservatively estimated that the company's removal rate was 60%, which is equivalent to sales of 114 billion yuan, or a 25% increase over the previous year. Growth will continue relatively rapidly in the future, and life in Austria will benefit as a result.
Another highlight of Aoyuan Life is its commercial operation service, which invests some of the parent company's high-quality shopping mall resource management in Aoyuan Life. In addition to obtaining new contracts from independent third party developers driven by the Aoyuan brand effect, segment revenue rose to about 118 million yuan in 2017 at a compound annual growth rate of 98%, and revenue for the first three quarters of 2018 rose further to 121 million yuan. The average profit margin of commercial operations is high. Coupled with the land storage of 6 million square meters of commercial property in Aoyuan, China, it has become the driving force for growth in Austrian life.
Successful Lotus Limited, under the name of Mr. Li Jiajie, Executive Director and Vice Chairman of Henderson Land Corporation (12 HK), agreed to subscribe for HK$40 million of offered shares as a cornerstone investor. We believe this move further strengthens the strategic cooperation framework agreement signed earlier by the two groups.
Weaknesses and Risks
The property management industry is one of the labor-intensive industries. Labor costs account for more than 60% of the total cost of living services in Austria. Higher minimum wages and higher labor costs will affect future profitability. By standardizing services to reduce the degree of reliance on manual labor, the company is rapidly reducing service costs.
There is great uncertainty about the environmental economy. Sales in third- and fourth-tier cities are expected to be high in the short term when investment demand declines.
Investment valuation
Assuming the following price limit (HK$3.48 per share), excluding listing fees, net profit as of September 2019 was about $70 million, and the proportional static price-earnings ratio for the full year of 2018 (fully diluted) was about 23 times. As of September 2019, the company's total contract area is about 20 million square meters, and the charging area is about 10 million square meters. According to our estimates, China's Aoyuan will carry over 5 million square meters of sales area in 2019. Assuming that all of it is taken over by Aoyuan Life, the company's growth can maintain a high level in 2019-20, so it is given an IPO-specific rating of “7.”