A woman points to the model of a residential complex by China Vanke as a sales representative introduces the property to visitors at her showroom during the National Day Golden Week holiday in Dongguan, east China’s Guangdong province, 2 October 2018. REUTERS/ Stringer
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HONG KONG, Sept 22 (Reuters Breakingviews) – Big names are attracting interest in deals, but that also comes with risk. China Vanke (000002.SZ), the largest private developer in the People’s Republic by market value, is braving both the volatile stock markets and the implosion of the mainland real estate sector to spin off its services unit with a valuation of nearly US$8 billion. That’s well below a previous price tag, but still commands a premium from many rivals.
At the top of the price range, residential and commercial property manager Onewo is set to raise around $790 million in Hong Kong’s biggest IPO. A funding round last year valued the group at around $14 billion, according to financial publication IFR. Two years ago, similar floats were trading at valuations of up to 27 times expected earnings. Those were better days: a Hong Kong index for the sector has since fallen 72%.
Onewo is valued at 17x 2023 earnings according to the IFR, which is about average for its peers. However, if you take a closer look, there is a wide gap between government-backed firms, which trade up to 30 times, and private rivals like Country Garden’s unit, which trades 8 times.
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Property managers’ bad luck has been stubborn sales – someone’s gotta empty the bins – with exciting talk about fast-growing technology offerings. Onewo follows this pattern with its high-tech unit, which generates less than 10% of sales. Perhaps that’s why “Space-Tech” has been dropped from its official name since it was first registered.
More relevant to profit, however, are the fluctuations in profitability that depend on Onewo’s customers. Last year, it generated a 16% gross margin monitoring residential real estate for its parent company, but 4% when working for others. For commercial real estate, the margins were 20% and 12%, respectively. It attributes the gap to the $28 billion Vanke brand and quality, as well as the setup costs of new third-party work. Unless Vanke does another blueprint, it’s hard to imagine Onewo maintaining anything like its recent 28% net earnings growth.
However, parent Vanke will draw some solace from other recent listings in Hong Kong. Duty-free operator China Tourism Group (601888.SS) raised $2.1 billion last month, and its shares are up 13% since then, outperforming the broader market. Despite this, Onewo doesn’t seem to make any major concessions to the harsh conditions it faces. In soft markets, that’s a risky question.
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(The author is a Reuters Breakingviews columnist. Opinions expressed are her own.)
CONTEXT NEWS
China Vanke is spinning off its property management unit Onewo in a Hong Kong IPO that could raise as much as $790 million and value the deal at nearly $8 billion.
At the upper end of the price range, at HK$52.7 per share, the deal would value Onewo at 24 times expected net income for 2022 and 17 times its forecast 2023 figures, according to financial publication IFR.
The float comes as the mainland real estate sector grapples with a liquidity crisis and a loss of confidence that has caused several developers to default, with more expected to come.
Vanke is the latest in a long line of its competitors to source funds from its service business, which handles residential and commercial real estate.
Onewo is expected to start trading on September 29th.
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Edited by Robyn Mak and Thomas Shum
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