Cautious recommendation, target price of HK$4.93 per share. We covered Color Life Service Group Co., Ltd. (“Color Life” or the “Company” for short) for the first time. Our report reflects the new management's idea of returning the focus to property management services and improving the refined operation level and service quality of the property through sorting through existing property projects. The company will enter a period of adjustment, and its growth rate is likely to slow down. Our DCF model assumes that the company's annualized revenue growth rate does not exceed 7% starting in 2019. Even so, our DCF model valued the company at HK$4.93 per share, which is equivalent to 12.2x 2019 EPS and 11.3x 2020 EPS. There is still room for an increase of 16.9% compared to the company's current stock price.
Management adjustments. In September and December 2019, Lottery Life made two changes to management and board members. Mr. Pan Jun, chairman of Huashang Nian, and Mr. Chen Xinyu, chief financial officer, were appointed as the company's executive director; Mr. Huang Wei, general manager of Kaiyuan International Property, was appointed as the company's executive director and also the company's CEO; Mr. Tang Xuebin was transferred as the company's non-executive director and resigned as the company's CEO, but will continue to serve as the company's vice chairman.
Strategy revisions. We believe the adjustments to the appointment of directors and chief executives mean that Color Life is rethinking its platform strategy. After active mergers and acquisitions and expansion in 2016-18, the new management team plans to systematically sort out the company's property projects, return the focus to property operation, strengthen the brand influence of Color Life by improving the quality of property management services, and actively reduce debt ratios and financial costs.
Reinvigorate and recharge your strength. We believe it is necessary for CaiLife to re-examine its service quality and recovery strategy after growing to 1.12 billion square meters of cooperative area. The growth rate of the company's performance is likely to decrease during the adjustment period: we expect revenue CAGR of only 3.0% and net profit CAGR of 6.2% for 2018-20. The company will implement its mergers and acquisitions strategy more carefully, and the company's short-term capital expenditure may be reduced, which in turn will optimize the net debt ratio, and financial expenses will decrease accordingly.
Risk warning: strategy adjustment failed
