Property market with cautious bidding

Under the strong leadership of the real estate industry, property stocks have been passive this year with little performance. Only some undervalued, high dividend yield property stocks have shown some market activity. However, the lack of market activity does not necessarily mean that the companies are not performing well. For example, C&D PROPERTY, which appears to have a P/E ratio of only a few times, has seen continuous high growth in performance over the years, yet its stock price has been continuously declining and is close to falling back to its pre-listing price. Is it a problem with the company or the market?

I. State-Owned Dark Horse Property C&D PROPERTY is a property management company under the Fortune Global 500 Xiamen C&D Group. C&D International and C&D Real Estate are the company's first and second largest shareholders, with the actual controller being the Xiamen State-owned Assets Supervision and Administration Commission. As a member of the C&D Group, the company has steadily climbed the rankings of the top 100 property companies with the abundant resources and brand advantages of its shareholders. In 2021, it ranked 34th, in 2022, 30th, in 2023, 25th, and in 2024, it rose another 9 places.

Since 2018, the company has maintained a high growth trend in performance, with revenue increasing from 449 million yuan at the end of 2017 to 3.575 billion yuan in 2023, achieving a CAGR of 41.3%. Non-GAAP net profit increased from 29 million yuan at the end of 2017 to 455 million yuan in 2023, with a high CAGR of 58.2%. It can be considered a dark horse in the property sector. In the first half of this year, despite industry downturn pressure and a high base from last year, the company still maintained double-digit growth, with revenue growing by 16.6% year-on-year and net profit increasing by 11%. It continues to perform well among listed property companies.

The company has four main business lines, including property management services, community value-added and collaborative services, non-owner value-added services, and commercial property operation and management services. It focuses on high-quality property services for middle and high-end residential properties, and also involves property management for public buildings such as commercial properties, hospitals, office buildings, schools, parks, and industrial parks.

Property management services, as the core business, are the company's main source of revenue. According to this year's interim report, property management service revenue was 859 million yuan, accounting for 53.6%. Year-on-year growth of 31.4%, still maintaining a relatively fast growth rate. **Mainly benefited from the growth in managed total area, which increased from 61.4 million square meters at the end of last year to 67.5 million square meters in the interim report. The growth in value-added businesses lagged behind, affected by the overall economic environment. The company's contracted area is 105 million square meters, covering 16 provinces and 63 cities. C&D PROPERTY's contracted-to-managed ratio has been maintained around 2.0 annually, but declined to 1.55 in the first half of this year. However, it still has a relatively ample reserve area, laying a good foundation for future performance growth. At the same time, the parent company C&D International's total sales amount has grown against the trend in recent years. Although it declined in the first half of this year along with the industry downturn, it has risen to 7th place in terms of sales amount among all real estate companies. Meanwhile, with abundant land reserves and a high equity ratio, as of the end of the first half of 2024, C&D International's total salable building area is 144.48 million square meters, with an equity ratio of 77%, which can continuously provide the company with abundant resources. In terms of independent third-party expansion, the company can rely on its state-owned background to enhance trust and competitiveness. As of the first half of 2024, the company's affiliated contracted building area is 645 million square meters, and the third-party contracted building area is 408 million square meters. The affiliated building area in managed projects is 427.9 million square meters, a year-on-year increase of 39.1%, accounting for 63.4% of the total managed area. The third-party managed area is 247.5 million square meters, a year-on-year increase of 24.7%, accounting for 36.6% of the total managed area. The revenue contribution ratios are 63.5% and 36.5%, respectively. Both the resources of the parent company and independently developed resources have grown relatively well, walking on two legs. The company has sufficient cash on hand, with 2.4 billion RMB. There is almost no interest-bearing debt, mainly accounts payable and contract liabilities. At the same time, the scale of the company's contract liabilities in the first half of the year further increased to 580 million RMB. In addition, there are two main risks commonly faced by property stocks, C&D PROPERTY is not very typical in terms of: 1. Goodwill. C&D PROPERTY's total goodwill and intangible assets amount to only 112 million, with little risk of impairment. 2. Accounts receivable. C&D PROPERTY's accounts receivable surged to 1.015 billion in the first half of the year. The financial report stated that this was mainly due to the expansion of management scale and some appreciation businesses that have not reached the settlement period. Corresponding to the financial statements, it is still reasonable. Generally, C&D PROPERTY's accounts receivable is relatively high in the middle of the year and then drops significantly at the end of the year, with over 90% of accounts receivable due within 1 year. Although the overall scale is growing rapidly, the overall risk is still considered manageable.

However, C&D PROPERTY and its major shareholder C&D International have a common issue, which is the continuous increase in share capital. This is the biggest problem from a stock perspective. C&D PROPERTY diluted the overall shareholder return through placements, equity incentives, and stock dividends, without conducting share buybacks after dilution. Although the dividend yield of C&D PROPERTY looks good in terms of dividend level, without share repurchases after dilution, the overall shareholder return has dropped to a less attractive position. For example, with a share dilution of nearly 4.6% in 2023, and a dividend yield calculated at around 8% based on the stock price on the dividend day of May 28 this year, the overall shareholder return is less than 4%.

More importantly, with such expectations for shareholder returns, the market is likely to hesitate unless the management provides some assurance between performance growth and shareholder returns.

In terms of real estate and property management, C&D PROPERTY's performance is actually good, but the stock price performance is poor. Apart from insufficient returns to shareholders, industry influences are also at play. The issues in property management are largely related to real estate. However, normally, with the business model of property management, real estate should not have a significant impact on property management operations. Because the clients of property management companies are homeowners who have already purchased houses, whether new houses sell or not has little to do with property management; it already has a steady stream of operating income.

But why does the market seem to show that property stocks and real estate stocks are closely related? Many property stocks have been dragged down along with the decline in real estate, and their P/E ratios have been brought down to single digits. It is relatively easy for property management to generate cash flow, but the capital market requires growth and more cash flow to increase valuation. In the past, the parent companies of real estate played an important role in the growth of property management. The real estate parent companies continuously acquired land, sold houses, and then handed over the property to their own property subsidiaries. Under this development logic, the more resources the parent company has, the more secure the growth of the property subsidiary, and naturally, the valuation goes up. However, now the real estate industry is struggling, with real estate parent companies finding it difficult to survive, let alone provide resources to their property subsidiaries. As a result, the growth expectations of the subsidiaries are cut off, and valuations are reverting back along with the real estate sector Secondly, the changes in real estate have affected the overall environment. This is an indirect impact, but the relationship is still relatively close. The deep adjustment of real estate has increased the complexity and severity of the domestic economic environment, leading to overall weak demand, which brings significant uncertainty even to properties with relatively stable models. On one hand, many property companies launched mergers and acquisitions during the good economic times to enhance their overall scale. However, due to loose control over the acquired assets and the accumulation of a considerable amount of goodwill, these actions have become burdensome during economic downturns. On the other hand, the economic weakness and overall consumption downgrade have made it more difficult to collect property fees, resulting in increasing accounts receivable. At the same time, there has been a decrease in demand for some value-added services provided by properties. In some cities, there are calls and expectations to reduce property fees. To cope with such a special period, most property companies are slowing down to improve quality and ensure cash flow. Therefore, property stocks that can stably distribute high dividends and have a high dividend yield are favored by the market. Furthermore, the current market also prefers properties that can independently explore third parties on a large scale, demonstrating their strong market competitiveness. However, the property business model is somewhat homogeneous. As long as the price is right, normal service demands can be met, and in general, once a property company is selected, it is unlikely to be changed. Therefore, the property company can continue to earn money from properties in a certain area. Thus, a high proportion of external expansion mostly indicates less reliance on the parent company for growth, rather than a superior model. It just means that during the real estate downturn, properties that do not need help from the parent company can survive more easily. Strong external expansion mostly reflects sales capabilities. Of course, this is a good ability. If the parent company still has the ability to provide resources, it is not a bad thing. However, the market is concerned that if the parent company cannot provide resources in the future, what will happen, making it easy to criticize similar companies. It is necessary to dialectically look at the parent company's operating conditions. Finally, from a long-term perspective, although the operation of property companies seems simple, it requires good management insight. Maintaining good cash flow is one aspect, and if the company has the strength to acquire good assets and make a difference during market downturns, there is room for rapid growth. Conclusion: C&D PROPERTY has relatively few problems left over from the previous property stock frenzy period. However, compared to some peers, the stock price is not cheap enough, and shareholder returns and expectations are not high enough. In the current industry downturn, property stocks are valued using PB, calculating the value based on physical assets, while PE valuation is only used during normal periods. When using PB valuation, it is important to note how much real assets are included in net assets. The property management model is completely different from real estate and is an industry worth long-term attention. However, in the current complex economic environment, it is indeed necessary to be more conservative in bidding