Hejing leisurely living Group (3913 HK-HK$ 7.73) announced the acquisition of an 80 per cent stake in Cedar Zhaopin Technology for 1.316 billion yuan, equivalent to a price-to-earnings ratio of 12 times earnings for the 20 fiscal year. Cedar Zhaopin has a management area of 86 million square meters, and its acquisition scale far exceeds market expectations (original guidelines: 55 million square meters). This acquisition will enable Hejing leisurely to strengthen its nationwide layout and increase its managed area to about 127 million square meters, which will be significantly higher than the 41 million square meters in fiscal year 20 and the 86 million square meters previously guided in fiscal year 21. In view of its size and potential regional synergies with Hejing, we find the valuation of this acquisition attractive. Although the share price has risen about 50 per cent since mid-December, the valuation of Hejing leisurely living is still attractive (21.6x/14.6x 21 prime 22 price-to-earnings ratio), with three-year earnings growing at a compound annual growth rate of 70 per cent. (1) the revised profit forecast, (2) good M & A record and (3) the revaluation of the mall sector will be the main catalysts in the future.
Guidelines for increasing the area under management in 2021
Management is optimistic about the outlook for 2021 and expects the area under management to reach more than 160 million square meters in 2021, compared with 41 million square meters in fiscal year 20 and 86 million square meters in the previous fiscal year 21. The upward revision is attributed to: (1) the major acquisition of Cedar Zhaopin: (86 million square meters), (2) the area delivery of Hop King Pacific (1813 HK- HK$10.88) and (3) third-party bids. The acquisition not only significantly increases the company's area under management, but also expands its scope of business to urban services, public buildings, industrial parks, schools and hospitals.
The increase in project density and the proportion of value-added services will increase profitability, according to management, about 80% of the managed area of Cedar Zhaopin is located in the Greater Bay area, the Yangtze River Delta region and the central and western regions, while Hejing leisurely living is about 90%. We believe that higher project density can help Hejing leisurely (1) reduce management costs and improve human efficiency, and (2) increase its local brand image to win more third-party projects.
In addition, Cedar Smart now mainly provides basic property management services, so the management believes that high-margin value-added services have great room for improvement.
The valuation of business transportation business still needs to be revalued.
As we mentioned in our previous report, high-quality mall operators should get higher valuations than residential property management. After the listing of China Resources Vientiane (1209 HK-HK$40.90), we believe that the valuation of premium mall operators is already being revalued. Benefiting from (1) Hejing Tai Fu's rich store project reserves and (2) potential third-party project brand output (5-6 projects per year), we believe that the company's business sector is still undervalued. We estimate that the profit contribution of its commercial sector will further increase to ~ 50% by 2022, compared with about 40% in 2019, which will further promote its valuation revaluation.