China Resources Vientiane lives in Hong Kong IPO: high-margin business depends on the return on assets of the parent company is declining year by year

SMM Network News: China Resources Land (01109.HK) spin-off property listing finally "see the sun", the company's China Resources Vientiane Life Co., Ltd. (hereinafter referred to as "China Resources Vientiane Life") recently submitted a prospectus on the Hong Kong Stock Exchange.

According to the prospectus, China Resources Vientiane earned 3.134 billion yuan in income in the first half of 2020, ranking sixth among listed property companies in Shanghai, Hong Kong and Shenzhen, with a gross profit margin of 24.1%, lower than the average of 29.4% of 26 listed property companies in 2019.

It is worth noting that when China Resources Land first revealed the divestment plan, property management and commercial management were planned separately, but this time China Resources Vientiane Life packaged residential, office, commercial and other property services together.

"Hong Kong stocks can not value commercial real estate too high now. Wanda Commercial and SOHO China have all chosen to be privatized and delisted before. Packaging business management is telling the story of property stocks. " An analyst of Hong Kong stock institutions told the Financial Associated Press.

High gross margin business depends on related party transactions

According to the data, the income of China Resources Vientiane in 2017, 2018, 2019 and the first half of 2020 was 3.129 billion yuan, 4.431 billion yuan, 5.868 billion yuan and 3.134 billion yuan respectively, while the profits in the same period were 388 million yuan, 422 million yuan, 364 million yuan and 338 million yuan respectively.

As of June 30, 2020, China Resources Vientiane lives in the management of residential and commercial properties with a floor area of about 106 million square meters, and a shopping mall providing commercial operation services with a construction area of about 5.6 million square meters.

According to the prospectus, the company's customers mainly include property developers, owners, owners' committees, tenants and tenants. During the business record period, China Resources Group and China Resources Land (together with their respective joint ventures and associates) were the two major customers, accounting for 31.2%, 32.2%, 32.3% and 36.0% of total revenue in 2017, 2018, 2019 and the six months ended June 30, 2020, respectively.

"at present, the judgment criteria of Hong Kong stocks have changed, and independence is not very crucial. as long as the parent company is strong enough, related party transactions can be understood as advantages." An analyst of Hong Kong stock institutions told the Financial Associated Press. Societe Generale Securities said in the latest research report, "the continuous related party transaction limit can be used as a reference for performance growth."

However, China Resources Vientiane's high-margin business operations and property management services are highly dependent on the parent company, which is still one of the hidden worries for future performance growth.

In 2017, 2018, 2019 and the first half of 2020, China Resources Vientiane's gross profit margin was 13%, 15%, 16.1% and 24.1%, respectively. "the increase in gross profit margin was mainly due to the increase in revenue contributed by the Business Operations and property Management Services Division, which had a higher gross margin than the Residential property Management Services Division." The company said in its prospectus.

Specifically, in the first half of 2020, the gross profit margin of residential property services was 14%, that of shopping malls was 36%, and that of office buildings was 35.3%, both of which were more than twice that of residential buildings.

China Resources Vientiane Life's business from independent third parties is more in residential projects, while high-margin shopping malls and office buildings are mostly from the parent company. According to its prospectus, as of June 30, 2020, 64% of total revenue came from independent third parties, including 43.2% for residential property management services and 20.9% for business operations and property management services. For the commercial part with high gross margin, 55% of the revenue comes from the parent company, China Resources Group and China Resources Land, which is higher than that of independent third parties, among which office buildings have the highest correlation, with only 4.6% of the managed area in the first half of 2020 coming from independent third parties.

The listing of Packers helps to improve valuations

At the 2019 interim results meeting of China Resources Land, the management of the company introduced that the property and business would be listed separately, and the property listing would be launched first. This time, China Resources Land has packaged residential property management services and commercial operation and property management services, including shopping malls and office buildings.

Residential property and commercial operations accounted for 53.6% and 46.4% of the total income of China Resources Vientiane Life in the first half of 2020, respectively.

"the reason for the subsequent re-election, packaging and listing is mainly to do large-scale. They have so many formats to constitute 3 billion business, of course they can only do so. " The executive director of a listed property company told the Financial Associated Press.

"the company believes that we should build a complete light asset management platform for property management and commercial management with the characteristics of China Resources Land, and rely on the existing business advantages of China Resources Land to expand and strengthen the light asset management platform. On the one hand, it can improve the value creation of assets, on the other hand, it can also become a new profit highlight of China Resources Land." Li Xin, executive director and president of China Resources Land, said at the August 26 interim results meeting.

"China Resources Land package business management, similar to Baolong business, commercial property rights are still in the parent company, not rent but management fees. According to the valuation of property stocks, if the growth story is told well, it can improve the valuation. " The above-mentioned Hong Kong stock institutional analysts pointed out.

The asset return ratio of China Resources Vientiane fell from 15.1 per cent in 2017 to 8.8 per cent in 2018 and further to 5.7 per cent in 2019, according to the prospectus. The return on equity ratio fell from 121.2 per cent in 2017 to 86.2 per cent in 2018 and further to 43.0 per cent in 2019. In this regard, it is interpreted as due to the growth of total assets and the low initial equity base.

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