Nowadays, property developers are taking on unprecedented challenges. Under the multiple control measures such as the Three Red Lines policy and centralized land supply, the development of property developers is once again put on hold, leaving the capital markets fraught with pessimism about the property development industry.
But surprisingly, the capital markets are still expressing great interest in property-related industries such as the property management services industry. According to Choice’s data, the P/E ratios(TTM) of Sunac (Sunac China Holdings Limited), Poly (China Poly Group Corporation Limited), and Country Garden (Country Garden Holdings Company Limited) are all around 5x, while the P/E ratios(TTM) of Sunac Services (Sunac Services Holdings Limited), Poly Services (Poly Property Services Company Limited), and Country Garden Services (Country Garden Services Holdings Company Limited) are maintained at the level of about 20x, which means that the valuation level of property management service companies are far more exceeding that of real estate companies.
It is not difficult to understand the logic of the capital market’s optimism on the property management services industry. For one thing, the property management services industry has a superior business model and possesses the attributes of asset-light operation; for another, the market size of the property management services industry is large enough. A research report by Orient Securities points out that by 2030, the market size of the basic property management services will reach RMB1.7 trillion.
The excellent business model coupled with the massive market size has also drawn a multitude of titans into the track of property management services, leading to increasing industry differentiation and cut-throat competition. In this context, how should medium-sized property management service companies capture the historical opportunities of the industry?
Recently listed on the Hong Kong stock market, Desun Real Estate Investment Services Group Co., Ltd. (Desun Services) (02270.HK) demonstrates a good showcase for reference.
As a property management service company that focuses on Sichuan-Chongqing Region, the revenue scale of Desun Services is not substantial, but its revenue level has soared dramatically in recent years. According to the prospectus, for FY2018, FY2019, FY2020, and 5M2021, Desun Services recorded revenue of RMB63.964 million, RMB69.116 million, RMB127.922 million, and RMB89.159 million, respectively, representing a CAGR (compound annual growth rate) of approximately 41.4% between 2018 and 2020.
The reasons for the high growth of Desun Services are twofold: firstly, Desun Services specializes in the mid- to high-end property management services market, while focusing on the Sichuan-Chongqing Region with rapid economic growth, thus creating a unique differentiated competitive advantage; secondly, Desun Services is backed by Chengdu Desun Property Co., Ltd and its subsidiaries, joint ventures and associated companies (Desun Property Group), whose vigorous support, combined with the company’s strong M&A (mergers and acquisitions) and integration capabilities, has guaranteed the growth of its performance.
From a long-term perspective, with the growth of the property management services industry, Desun Services is promising to achieve sustained high growth with its existing competitive advantages.
In the era of the boom of the property management industry development, differentiation is underway
From the current perspective, the property management services industry is still fast-growing on a massive scale. According to the research report by Orient Securities, by 2030, the GFA (gross floor area) under the management of the property management services industry will reach 36.9 billion sq.m., and the market size of the basic property management services will attain RMB1.7 trillion, with a total industry size (basic services + value-added services) exceeding RMB2.5 trillion.
The rationale behind this is clear. On the one hand, in past years, the penetration rate of residential properties was not high in the past due to the low level of urbanization. In recent years, the penetration rate of residential properties has continuously increased along with the advance of urbanization. According to the data of China Index Academy, the penetration rate of total existing properties in 2020 was 53.5%, representing an increase of 10.2 percentage points compared to 2015. Nevertheless, there is still ample room for improvement compared to the penetration rate of residential properties of 93.7% in Beijing.
On the other hand, following the release of policies such as “reform of logistic services for authorities and enterprises and public institutions”, and “promotion of social capital investment and operation in the public service sector”, the ceiling of non-residential property management business has been rising. As the trend in the above Figure shows, the growth rate of the GFA under management for non-residential properties in 2020 was obviously higher than that for residential properties.
To some extent, the current property management services industry is in a parallel development stage of existing stock optimization and incremental expansion.
From the perspective of the market of existing stock, the leading property management service companies are undergoing rapid expansion. The market share is surging, and the industry concentration is converging on the real estate industry, making the market competition increasingly fierce.
From the perspective of the increment market, some property management service companies have begun to create a second growth curve by focusing on high-margin businesses, such as value-added services for non-property owners, water, electricity, and heating supplies and property management, urban services, and commercial operational services, in order to create a new arena.
Consequently, the development of the property management services industry is diverging. The data from China Index Academy indicates that in 2021, the market share of the top 100 companies in the property management services industry reached 52.10%, representing an increase of 1.09 percentage points compared to 2020; however, the market share of the top 10 property management service companies was 16.11%, up 5.94 percentage points compared to 2020. The market share of the top property management service companies is increasing significantly faster than the industry average.
Notwithstanding this, compared to the top 100 companies in the property development industry with a market share of 75%, there is still ample room for improvement in the concentration of the property management services industry. This implies that existing players still have the opportunity to “move forward against the tide and rise to the top”. Looking back after a decade, the curtain has been lifted on a battle to differentiate the players and reshuffle the property management services industry.
A question to ponder is how medium-sized property management service companies seize the opportunity to grow further. In this regard, Desun Services, which was recently listed on the Hong Kong stock market, serves as a nice reference for us.
Aiming at the mid- to high-end market, Desun Services is engaged in the differentiated competition
As a property management service company that focuses on Sichuan-Chongqing Region, the revenue scale of Desun Services is not substantial, but its revenue level has soared dramatically in recent years. According to the prospectus, for FY2018, FY2019, FY2020, and 5M2021, Desun Services recorded revenue of RMB63.964 million, RMB69.116 million, RMB127.922 million, and RMB89.159 million, respectively, representing a CAGR of approximately 41.4% between 2018 and 2020.
In the increasingly competitive property management services market, the performance of Desun Services has been able to maintain high growth year after year, mainly owing to the company’s positioning towards differentiated development. The so-called differentiation consists of two main points: focusing on the mid- to high-end property management services market with a higher threshold, and choosing to concentrate on the Sichuan-Chongqing Region, where the economy is booming and competition is less intense.
Let’s start with the former. Unlike the vast majority of property management service companies, Desun Services focuses mainly on the mid- to high-end property management services market. According to the prospectus, the average property management fee of the properties under management was RMB3.9 in FY2020, 50.0% higher than the average property management fee of RMB2.6 for properties in Chengdu and 105.3% higher than the average property management fee of RMB1.9 for properties in China.
The significance of Desun Services’ focus on the mid-to high-end property service market is manifested in two aspects.
On the one hand, the focus on the mid- to high-end property management services market with a higher threshold can steer clear of the highly competitive low-end market; on the other hand, this can not only enable the company to develop more diverse industry chain services, but also contribute to building its favorable brand reputation.
To date, the whole-industry value chain service capability acquired by Desun Services, along with its excellent brand reputation, has also boosted the growth of its value-added services, commercial operations, among other businesses. According to the prospectus, in FY2018, FY2019, and FY2020, Desun Services recorded revenue generated from value-added services amounting to RMB33.811 million, RMB34.932 million and RMB66.487 million, respectively.
From the perspective of the industry, value-added services, commercial operations and other businesses can substantially enhance the overall strength of Desun Services. In particular, the value-added service business has a higher gross margin, which can not only improve the company’s overall profitability, but also assist the company in creating a diverse revenue curve to enhance its resilience to risk.
In terms of branding, Desun Services has also earned manifold accolades in the industry. For example, in 2018, the company was awarded “2018 Top 50 Integrated Strength Property Management Services Companies of Chengdu” by Chengdu Property Management Association; in 2021, the company was awarded “2021 Top 100 Property Management Companies in China” by China Index Academy.
In addition to focusing on the mid- to high-end property service market, the geographical advantage is also an indispensable factor for the differentiated development of Desun Services. Geographically, Desun Services has opted to focus on the Sichuan-Chongqing Region, so as to not only stay away from fierce competition, but also fully reap the dividends of the rapid growth of the Cheng-Yu Economic Circle.
According to Frost & Sullivan Analysis, From 2015 to 2020, the total revenue of property management service companies in Sichuan-Chongqing Region increased from RMB31.2 billion to RMB55.1, with a CAGR of 12.0%; In 2025, the total revenue of property management services in Sichuan-Chongqing Region is expected to reach RMB92.4 billion, with a CAGR of 10.9% from 2020 and 2025.
Taken together, the emphasis on the mid- to high-end market has equipped Desun Services with the capability to serve the whole industry value chain, which in turn allows it to expand value-added services, commercial operational services and other services more smoothly to improve the company’s comprehensive strength; while the focus on the Sichuan-Chongqing Region, where property management services are thriving, has presented Desun Services with a historic opportunity to “resonate” with urban development.
In this sense, the differentiated approach has emboldened Desun Services to capture more market share.
With the diverse expansion, Desun Services is headed for a fresh start in value creation
In the context of the industry’s major divergence, scale is still the primary development direction for property management service companies. For property management service companies, the scale is mainly reflected in the GFA under management.
Over the past few years, the GFA under the management of Desun Services has also proliferated. According to the prospectus, for FY2018, FY2019, FY2020 and 5M2021, the GFA under management of the company was 533.5 thousand sq.m., 792 thousand sq.m., 3,834.6 thousand sq.m. and 4,154.2 thousand sq.m., respectively.
Then how has Desun Services been able to constantly expand the GFA under management? From the perspective of the industry, there are three major approaches for property management service companies to increase the GFA under management: synergistic development by association with real estate enterprises, M&A, and brand extension.
At present, Desun Services relies mainly on the first two approaches to expand the GFA under management. Specifically, Desun Services is backed by Desun Property Group, which lends strong support to its growth in the GFA under management. Desun Property Group, as one of the Top ten Real Estate Sales Revenue in Chengdu, is able to provide considerable growth in the GFA under management for Desun Services every year.
Meanwhile, Desun Services possesses strong financial strength as well as M&A and integration capabilities.
On the one hand, Desun Services, which has just completed its IPO, has abundant capital reserves. According to the prospectus, Desun Services plans to spend approximately 60% of the proceeds on strategic investments and acquisitions in order to scale up its property management and commercial operations.
On the other hand, Desun Services has extensive experience in M&A and integration. In August 2020, Desun Services acquired Zhongneng Group to enlarge its business portfolio. Zhongneng Group suffered a deficit in 2019, and under the integration of Desun Services, Zhongneng Group became profitable in 2020 with the net profit margin improved to 11.5%.
In terms of the external environment, the valuation of property management service companies is at a low level now due to the impact of the real estate liquidity crisis, making it an excellent M&A opportunity in the industry for Desun Services.
According to the data of Choice, as at December 10, 2021, 71 M&A transactions had been disclosed in the property management services industry this year, involving 33 property companies as acquirers, with a transaction value of approximately RMB33.33 billion, representing an increase of approximately 215.33% compared to the total annual transaction value in 2020. Among them, the valuation level of M&A targets ranged between 7.45x and 26.9x, down about 20% compared to the average valuation level in 2020.
From the perspective of the extended cycle, in the context of the continuous growth of the property management services industry, Desun Services is promising to gain a larger market share during the industry development by virtue of its differentiated competitiveness, solid cash reserves and profound capability to integrate resources. In this respect, Desun Services is at a fresh start of business development and merits long-term follow-up.
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