ismagilov
It boasts high-tech credentials as it aims to make Hong Kong’s biggest IPO so far this year. But the property management branch of one of China Vanke Co. Ltd. (OTCPK:CHVKF) (2202.HK; 000002.SZ), one of the country’s Top developer, hampered by a flagging real estate market.
Vanke is the latest in a growing list of Chinese developers to spin off their real estate and space management services businesses Onewo Inc. went public after passing its listing hearing earlier this month. The company is said to be planning to do so raise at least $2 billionwhich could make it the biggest fundraiser in Hong Kong this year if the final figure tops the $2.1 billion raised by CT Group Duty Free (1880.HK; 601888.SH) in its listing last month.
onewos preliminary prospectus shows that it has three main lines of business: residential and community services; integrated services for commercial, urban, artificial intelligence, Internet of Things (AIoT) and business process as a service (BPaaS) services.
The first two, which include traditional residential and commercial real estate services and urban space integration services, are the company’s main sources of revenue, contributing more than 90% of total sales in recent years. The newer AIoT and BPaaS services are a more recent addition that primarily provide services for remote space technology operations.
Last year, Onewo’s revenue reached 23.7 billion yuan (US$3.4 billion), up 30.6% year-on-year. Its residential services division, its largest contributor, managed 660 million square feet of floor space. Compared to industry leaders country gardenings (OTCPK:CTRGF) (6098.HK) reported revenue of 28.84 billion yuan in 2021 and managed 766 million square meters of residential real estate.
missed window
Vanke launched its property management services division in 1990, but is a relative latecomer in the wave of spin-offs for such businesses in recent years. The first indication that such a move was planned came in October 2020 when the company’s name was changed from Vanke Property Management to Onewo.
But the spin-off has progressed more slowly than most, causing the company to miss the best window to list as equity market sentiment weakened and China’s real estate market stagnated after years of explosive growth.
The real estate management IPO wave began with the stock exchange listing in 2014 Color Life Services Group (1778.HK), the wealth management branch of Fantasia stocks (1777.HK). The larger Country Garden Services came at an ideal time, trading at an opening price of HK$10 at launch in June 2018 before peaking at HK$85.20 by June with a market capitalization of more than HK$280 billion ( $35.9 billion) reached last year. Some believe Onewo could have posted an even stronger performance if it had been listed at the same time.
But with house prices now collapsing and many projects left uncompleted, investors have cooled on property management stocks. As of Sept. 13, the Hang Seng Property Services and Management Index was down about 60% from a year ago. At Wednesday’s close of HK$15.40, Country Garden Services is now trading at less than a fifth of its high.
Despite the headwind, Onewo’s determination to go public could be for the sake of the parent company, whose business has stalled recently, similar to many of the top Chinese developers. Domestic home construction and sales have been in a deep rut for the second half of last year, resulting in numerous unfinished homes with buyers now refusing to pay their mortgages. This puts pressure on developers to complete their projects and get the market going again.
Vanke is a case in point. The company’s revenue rose just 8% to 452.8 billion yuan last year, while net profit fell 45.8% to 22.5 billion yuan. Onewo filed its listing application a day after Vanke submitted its abysmal annual report in March.
Despite strict government measures to curb speculation in the domestic real estate market, Onewo has seen sales growth of over 30% over the past two years. However, net income growth shrank from 44.2% in 2020 to just 12.9% last year as cost of sales continued to rise due to rising labor and subcontractor costs. It’s also worth noting that in 2021, ahead of its IPO, the company suddenly paid out a dividend of 3.5 billion yuan, double its annual profit.
Vanke currently holds 57.12% of Onewo shares, another 5.77% are held by affiliated companies. Other shareholders include Boyu Capital, 58 Tongcheng and Linzhu Group. Last year’s high dividend, combined with dividends of 247 million yuan and 318 million yuan from the previous two years, has brought Onewo’s total dividends over three years to more than 4.1 billion yuan, almost 4.27% profit billion yuan over the same period. With 62.89% of Onewo shares, Vanke was the biggest beneficiary of this size.
Big on technique
Against the backdrop of weak stock market sentiment and an industry downturn, Onewo is forced to find a more compelling story to attract investors and boost its IPO rating. It believes it has such an advantage in using technology. The preliminary prospectus shows that the IPO funds will be used primarily for business expansion, development of existing AIoT and BPaaS solutions, and acquisition or investment in upstream and downstream supply chain service providers.
Applications covered by Onewo’s current AIoT and BPaaS solutions mainly include vehicle violation monitoring, trash detection, overflowing trash cans, and other community management issues that are relatively low-tech. In addition, AIoT and BPaaS-related revenue was only about 500 million yuan in the first quarter of this year, accounting for only 7.3% of total revenue, up slightly from 5.8% of total revenue in 2019. It seems to be the company’s “transformation story” to a high-tech piece, it still takes some time to materialize.
To gauge how Onewo might be valued, we can refer to the forward price-to-earnings (P/E) ratios of peer companies Country Garden Services. China Resources Mixc Lifestyle Services (1209.HK) and Property ownership in China overseas (OTCPK:CNPPF) (2669.HK), ranging from 9.5x to 40x. At an average of 25.8, Onewo would have a market value of just HK$33 billion ($4.2 billion) based on estimated earnings for this year. Even if it could do better valuation-wise, the market’s expectation of raising $2 billion or more could be unattainable, dashed any hopes that Onewo might be able to capture Hong Kong’s 2022 IPO crown .
Disclosure: none
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Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.
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