2021 results in line with market expectations
Sunac Services Holdings announces 2021 results: Revenue rose 71%　YoY to Rmb7.9bn, and attributable net profit increased 114% YoY to Rmb1.28bn, largely in line with market expectations.
　　Steady growth in managed GFA in 2021. Contracted GFA grew 94.60mn　sqm on a net basis to 358mn sqm in 2021, including 36.12mn sqm from independent bidding. Contracted GFA from independent bidding grew rapidly in 2H21, with monthly average newly added GFA of 4mn sqm (vs. 2mn sqm in 1H21). Managed GFA increased 79.6mn sqm on a net basis to 215mn sqm in 2021, including 17.78mn sqm from bidding and 24.1mn sqm from M&A, largely in line with the company’s previous guidance.
　　Profit contribution of VAS to non-property owners remains high. In　2021, revenue from value-added services (VAS) to non-property owners increased 60% YoY to Rmb2.68bn thanks to the launch of the firm’s home repair business and the rapid growth of the consulting business. VAS to non-property owners contributed 38% of total gross profit in 2021, remaining at a high level.
　　Diversified businesses show rapid growth. Revenue from community
　　life services jumped 188% YoY to Rmb507mn in 2021. Specifically, revenue from home services, brokerage services, and home decoration all doubled. In October 2021, the firm announced the acquisition of a commercial property management firm from its parent company. Revenue from this new commercial operational management business was Rmb176mn in 2021, with a GM of 79.2%.
　　Trends to watch
　　Sunac Services renews guidance, expecting earnings to grow at a　CAGR of 25% in the next 3 years. In particular, the firm estimates new managed GFA from parent firm at around 40mn sqm in 2022 (original plan, 54mn sqm; actual GFA delivered by parent firm was around 45mn sqm in 2021). Meanwhile, the firm expects third-party bidding to accelerate (especially for non-residential projects), and managed GFA from third parties should account for about 50% in 2024. It also guides that revenue from community life services should grow at a CAGR of at least 50% in the next 3 years, with further potential to be unlocked on a single-project basis. As for earnings structure, the firm believes that the share of VAS to　non-property owners will continue to drop, while that of community life and commercial operational management services will edge upward.
　　Financials and valuation
　　We cut our 2022 and 2023 earnings forecasts 19% and 24% YoY to Rmb1.63bn (+28% YoY) and Rmb2bn (+23% YoY) as we are more　prudent about the firm’s managed GFA from its parent firm and earnings of VAS to non-property owners. We think challenges may emerge when the firm seeks independent development and business transformation amid the downward trend in business of the connected party. Given this and the adjustment in earnings forecasts, we maintain an OUTPERFORM rating but lower TP 59% to HK$6.20, implying 10x 2022e P/E with 24% upside.The stock is trading at 8.1x 2022e P/E.
　　Risks
　　Managed GFA from parent firm is smaller than Sunac Services expected; third-party bidding result disappoints; revenue from VAS to non-property owners drops faster than we expected; development of community life services is slower than we expected; COVID-19 resurgence puts pressure on revenue from commercial operational management business.