2021 earnings expected to grow 81% YoY
We expect Jinke Smart Services’ 2021 net profit to grow 81% YoY to Rmb1.12bn, in line with market expectations and the firm’s guidance.
Trends to watch
2021 GFA expansion and value-added services growth in line with expectations. We expect the firm to complete the full-year target of adding 80mn sqm of managed GFA in 2021 (at least 36mn sqm from third-party bidding and 25mn sqm from M&A). Value-added services such as home-living services, community management services and comprehensive living and travelling services grew significantly in 1H21. The firm further expanded home-decoration services and catering business in 2H21. We expect the firm’s 2021 revenue from value-added services to reach about Rmb1.2–1.5bn (vs. Rmb411mn in 2020).
We believe the firm has the ability to seek long-term quality growth. We conducted in-depth research on the firm’s businesses on January 13 in Chongqing, and we note that the firm has been improving its basic abilities and overall organizational structure. The following are some highlights: 1) The firm has been strengthening its senior management since 1H21, further clarifying responsibilities, business framework and management structure. 2) We think lean operation of projects and enhancement of management density will remain the cornerstone of sustainable growth of business scale. 3) Value-added services are growing rapidly in sectors such as catering, home-decoration as well as living and travelling services, and revenue from some businesses may exceed Rmb1bn in the next 2–3 years. 4) The firm’s leading technology to enhance management quality and efficiency, and we think project expansion will become an increasingly important competitive advantage. 5) The firm has the ability to seek independent long-term growth.
Valuation and recommendation
We keep 2021 and 2022 earnings forecasts unchanged (we expect 2022 earnings forecast to grow 47% YoY to Rmb1.64bn). We introduce 2023 earnings forecast at Rmb2.26bn (up 37% YoY). We maintain an OUTPERFORM rating. We raise TP 11% to HK$59 (implying 20x 2022e P/E with 80% upside), as we have stronger confidence in the firm’s growth potential.
We see significant value for asset allocation. The stock is trading at 11x 2022e P/E. In the short term, we believe that the property management sector as a whole may fluctuate due to investors' concerns about the outlook for the real estate industry. However, we think the firm’s organizational structure and businesses have been continuously improving (we started indicating this fundamental improvement since 1H21). Moreover, Boyu's investment has brought positive synergy to the firm’s management, and the firm actually has the ability to seek independent long-term growth. Therefore, we see significant value in Jinke Smart Services for asset allocation at this point.
Risks
Slower progress of third-party bidding in 2022; disappointing growth of community value-added services and/or integration of M&A projects.