Key takeaways:
- Jinmao Services has launched a Hong Kong IPO to raise $106 million, with plans to use the funds for acquisitions
- The company is the latest property manager to split off from its development-oriented parent, capitalizing on China’s housing boom of the last two decades
By Ken Lo
Another day, another Chinese real estate developer splitting off its property management arm into standalone unit to fend for itself.
The latest in that trend is China Jinmao Holdings Group Ltd. (0817.HK), which announced last Friday that it had peeled off its Jinmao Property Services Co. Ltd. (0816.HK) for a listing on the Hong Kong Stock Exchange’s main board. The IPO process began the same day and closed on Wednesday. Jinmao Services is offering 101 million shares at a price range of HK$7.52 to HK$8.14, with a goal of raising up to HK$825 million ($106 million). Its trading debut is tentatively set for March 10.
Jinmao Services provides premium property management and city management services, with around 36.4 million square meters in space under management at the end of last year. Of that, 64.4% was residential properties and the other 35.6% was non-residential.
Its parent, China Jinmao, holds 67.5% of the company. Most of the remainder is owned by Sinochem Group, which counts China Jinmao as the real-estate development arm of its sprawling business empire.
According to its prospectus, Jinmao Services generated 1.05 billion yuan in revenue in the first three quarters of last year, representing a year-on-year increase of 57.6%. It made a profit of 109 million yuan, doubling from the year-ago level, with its profit margin rising from 8% to 10.4% over that period. Much of the improvement owes to growing contributions from more profitable value-added services like consultation, planning and design services as well as post-delivery property services.
Prompted by new government-led restrictions designed to cool the property market and rein in corporate debt, many developers have been splitting off their property management arms and taking them public to raise cash and separate the two different kinds of businesses. At the same time, the broader property development and management sectors are also consolidating through M&A as companies fight for more market share to boost their economies of scale.
The policy restrictions have seen Beijing introduce “three red lines,” capping developers’ asset-to-liability ratio at 70% and their net asset-to-liability ratio at 100%, and setting a minimum cash-to-short-term-debt ratio of 100%. China Jinmao’s interim financial statement for the first half of last year put these ratios at 69%, 52% and 126%, respectively, within those three red lines.
Highly valued
So, why are developers like Jinmao Holdings, whose own finances are sound enough, rushing to take their property management arms public? We can look for answers in the prospectus, which says Jinmao Services plans to use the funds raised for acquisitions and other ways to achieve greater economies of scale, and also to lower dependence on its parent’s projects. We’ve seen this kind of logic before in previous listings, and it seems it still holds true for Jinmao Property.
In fact, 92.5% of Jinmao Services’ revenue in the first three quarters of 2021 came either from its two parent companies’ projects, or projects in which the parents held a stake. By the end of September last year, 86.6% of Jinmao Property’s area under management was tied to its parents, and only 13.4% was developed by independent third-parties. The company said it has been actively expanding its property management business to independent third parties since 2020 to reduce its dependence on Sinochem, its single largest customer and major shareholder.
Of the modest sum the company is aiming to raise, around 55% will be used for strategic investment and acquisition opportunities related to property management, urban development or community development. Another 22% will go to upgrade the company’s smart management service system and develop smart community and smart city solutions, and around 13% will go to developing value-added community services.
Jinmao Services says it will consider acquiring or investing in other companies as a majority shareholder at valuations that fall in the price-to-earnings (P/E) ratio range of 10 to 25 times. It added it aims to add three to eight property management or city service providers, and three to five providers of community-based products and services by the end of 2024.
The company’s keenness to expand stems from rising opportunities in the broader market. China’s rapid urbanization over the last two decades and growing per-capital disposable income has fueled a boom in the property management sector. Accordingly, the company doesn’t want to miss the gravy train and needs more funding for future acquisitions.
According to the data from China Index Academy, per-capital disposable income in Chinese cities grew at an average annual compound rate of 6.9% from 2016 to 2020, reaching 43,834 yuan at the end of 2020. Over the same period, the average area under management by China’s top 100 property management companies grew 15.7% per year to 48.8 million square meters. Average revenue rose by a similar 15.2% yearly to 914 million yuan on average over that time.
Take 2020 for example. Average property management fees in China’s first- and second-tier cities were markedly higher than those in the third- and fourth-tier ones, which works to the advantage of companies like Jinmao Services that focus on higher-end properties in big cities. Jinmao Services ranked No. 2 among China’s top 100 property managers in Beijing, the nation’s capital, in 2020 in terms of high-end areas under management.
Its profit in last year’s first three quarters translates to around a 146 million yuan profit this year on an annualized basis. Using that and a valuation of HK$6.78 billion ($868 million) to HK$7.34 billion based on its IPO price range, the company would have a P/E ratio of between 37.6 times and 40.7 times.
Two similar Hong Kong-listed companies, Country Garden Services (6098.HK) and Yuexiu Services (6626.HK), also both manage residential and commercial properties at similar scales to Jinmao Services. Their estimated P/E ratios were 29.3 times and 10.3 times, which suggests that Jinmao Services is valuing itself much more highly than its peers and is pricing its IPO shares quite aggressively.
That may explain why its offering has met with lukewarm response so far. By March 1, it had secured just HK$23 million from subscribing brokerages. And less than 30% of shares available for retail investors had been snapped up, reflecting a marked lack of enthusiasm.
