BNP Morningstar initiated coverage of Central China Management (9982.HK) with “BUY” rating and set its target price at HKD 3.92 per share for the following reasons:
Project management services for the real estate sector have taken off recently in China, driven by rising land costs and increasing competition that sees small and midsize developers seek the services of project managers with established brands to help derive higher returns on their projects. According to the research report, Central China Management Company, as a leading project manager in China with a strong presence in Henan province, is expected to benefit from industry growth of 23% over the next five years.
The Bank also expects that as the industry expands, there will be more spin-offs of project management units by smaller national and larger regional real estate developers given the attractive profitability. With the new entrants, the market share of leading companies’ such as CCMGT should remain high over the next five years.
BNP Morningstar is of the view that CCMGT can be regarded as a more defensive proxy to China’s real estate growth given its asset-light business model. Moreover, the Bank thinks it is noteworthy to see relatively stronger growth given demand for its services.
The research report mentions that CCMGT attributes their competitive advantage in Henan to the following key factors: 1) strong recognition of the Jianye brand; 2) well established and deep understanding of the Henan real estate market; 3) ability to provide a full suite of services; 4) a strong network of resources–namely designers, suppliers, contractors and others to work on the projects; and 5) ability to pass on completed projects to Central China New Life, the group’s property management service entity, to ensure the quality of the projects will be sustained.
The report adds that CCMGT’s strategy is to focus on maintaining its dominance in Henan and to sustain its profit margin. Since the penetration rate is still low for the industry at 3%-5%, moving up to around 9% by 2025. It is reasonable to assume that CCMGT will be able to sustain a decent profit level despite the prospect of new entrants to the industry. CCMGT has the luxury of being able to select the project it thinks it is better able to add value to. This is the other reason that should allow CCMGT to keep a fairly stable profit margin in the near term.
BNP Morningstar estimates that it is possible for upside to the profit forecast of CCMGT if the company’s ex-Henan projects take off. CCMGT is looking to acquire local teams to its business as it pushes into neighboring provinces. If so, profitability is likely to be more resilient.
The downdraft in China’s real estate sector on the Evergrande debt contagion concerns, places CCMGT at very attractive levels. The shares are trading at lows since listing on 31 May 2021 with a share price of HKD 1.2-1.3, placing the shares at 3.64-3.94 times 2022 price/earnings.