China Fund News reporter Nanshen
On October 27, the lottery life that had suspended trading for a month finally ushered in the resumption of trading, because the core subsidiary Lin Lile was forced to transfer shares by Country Garden Service, and its stock price plummeted by 35% in a single day. The reason for the forced acquisition of Color Life was the default of 700 million yuan of borrowings, and the cross-default triggered by the parent company Fantasia Holdings' US dollar debt explosion.
This means that Country Garden's service of this "property harvester" after Blu-ray Gerber and R&F Property successfully won the third "big fish eat big fish" merger and acquisition in the year, and its large and small mergers and acquisitions this year have reached 8 cases, costing nearly 20 billion yuan. As of the end of the half year this year, Country Garden's service contract area under management has exceeded 600 million square meters, and it has become a well-deserved "first property enterprise in the universe" after the parent company Country Garden was awarded the "First Housing Enterprise in the Universe".
Country Garden's services have been able to sweep the head of the property enterprises, the capital market continues to provide ammunition and confidence for large financing, and the business behind it is not complicated, it is still the ancient "buy low and sell high": more than 50 times the P/E ratio financing, more than 10 times the P/E ratio acquisition.
However, similar to the quality problems such as the collapse of the building caused by the "high turnover" of Country Garden, when the "harvester" is running at high speed, hidden worries about service quality and management have also begun to emerge. In the past two years, the number of lawsuits involving Country Garden's service property disputes has increased exponentially, and in July and August this year, a small area of Country Garden Guangzhou has had a series of major accidents. In addition, the acquisition of low gross margin companies such as R&F Property will inevitably have an impact on profitability.
Another "naked swimmer"
"Only when the tide fades, do you know who is swimming naked", buffett, the god of stocks, said this reasonable quote about investment, which is also applicable to business operations.
Under the pressure of a series of policies such as the "three red lines" of housing enterprise financing, the purchase restriction and loan restriction, and the "two concentrations" of land supply, the list of explosive housing enterprises has been adding new members since this year, Huaxia Happiness, Blu-ray Development, Evergrande, Xinli Holdings, Fantasia, Contemporary Real Estate...
In the case of both financing and sales at the same time squeezed, cash flow depletion, the sale of assets to save themselves is the only choice for these housing enterprises, the first to be sold is a relatively "easy to sell" high-quality assets - property management companies.
At this time, the person with cash in hand becomes the biggest winner, and can easily pick up the bloody chips that are easy to pick up.
On 27 October, Fantasia Holdings and its property management company, Color Life, jointly announced that due to Fantasia's unpaid external debts due to its outstanding external debts, and Fantasia Life failed to repay the loan of $700 million by October 4, 2021, the lender, Country Garden Property Hong Kong, a subsidiary of Country Garden Services, enforced its rights under the loan agreement and required Color Life to unconditionally transfer to it the entire issued share capital of the target company, Lin li Le. As of the date of the announcement, the transfer of the above shares has been completed, and the operation and management of Ryol is also being transferred.
According to the financial reports over the years, Neighborhood Le is the most core asset of Cai Life, which used to be the "first property stock", with Vientiane Beauty Property, Changbaishan Tourism Resort Property, New Century International, Kaiji Commercial, Vientiane Beauty Residence, Huaxu Property and Beijing Vientiane Beauty. In 2019 and 2020, the net profit after tax of Neighborhood Music was 306 million yuan and 309 million yuan respectively, while the net profit of Color Life was 536 million yuan and 542 million yuan respectively in the same period, and the net profit of Neighborhood Music accounted for 57.09% and 57.01% respectively.
With the release of the above announcement, the lottery life that suspended trading from September 29 was also resumed at the same time, but the result was already doomed. After the opening, The lottery life plunged all the way, falling by 40% in less than 20 minutes, and then maintained a low level of shock throughout the day, closing down 35.57% to close at HK$1.63, leaving a long volume of huge yin line.
Crazy harvest
Color Life can be said to be one of the largest property management companies in China, according to the data of this year's semi-annual report, its property area under management reached 360 million square meters, ranking fourth in the country. Eating the core subsidiary of Color Life, Neighborhood Music, is only the latest achievement of Country Garden's service of this "harvester for property enterprises", and the harvesting of this "big fish eating big fish" has been frequently staged this year.
In February this year, Blu-ray Gerber, a property management company under Blu-ray Development, which is mired in debt, announced that Country Garden Property Hong Kong intends to acquire 116 million shares (including domestic shares) of Blu-ray Garbo services held by Blu-ray and Jun, accounting for 64.62% of Blu-ray Gerber's shares, and the share transfer price was finally determined at 4.964 billion yuan. As of the end of 2020 before the announcement of the acquisition, Blu-ray Gerber also had a property area under management of 130 million square meters, ranking out of the top ten.
After winning Blu-ray Garbo, it also means that Country Garden Service has officially been promoted to "the first property enterprise in the universe". Country Garden Service's 2021 semi-annual report shows that its property area under management reached 644 million square meters, breaking the gap of nearly 200 million square meters of evergrande property in the second place.
But the "universe's first enterprise" has not stopped harvesting. On 20 September, Country Garden Services announced that Country Garden Property Hong Kong and R&F Property entered into an equity transfer agreement to acquire Furang Global, wholly owned by R&F Property, for a consideration not exceeding RMB10 billion, thereby indirectly acquiring 100% of the equity of each target company held by Furang Global. The target company referred to in the announcement is a number of companies engaged in integrated property management services in China, including residential property management and commercial operation services, held by Furano Global. This acquisition allowed Country Garden Property to acquire 0.86 billion square meters of area under management and 127 million square meters of contract area.
In addition to these big fish, the "property enterprise harvester" will certainly not let go of small fish, including Anhui Chenghe Property, Guizhou Hongtai, Guangzhou Smart City Investment, etc., all of which have been acquired by it. According to the incomplete statistics of Leju Real Estate, as of October 23, 2021, there have been 8 mergers and acquisitions reached by Country Garden Services this year, involving a total amount of RMB18.962 billion.
In addition, Country Garden Property has also invested in a number of property management enterprises through equity participation and equity pledge.
Last week, the Wanda Commercial Management Company of the former richest man, Wang Jianlin, submitted an application for listing in Hong Kong, and Country Garden Holdings and Country Garden Services were prominently listed in the list of strategic investors. The two companies each contributed 3.23 billion yuan and held 1.7945% of the equity of Zhuhai Wanda Commercial Management, with a total shareholding ratio of 3.589%. Since the beginning of this year, including Wanda Commercial Management, Country Garden has had 3 strategic investment projects, with a total amount of RMB7.707 billion.
In addition, in April this year, Jiangsu Galaxy Property, the target enterprise of Suning Real Estate's pledged equity, provided Country Garden with a pledged equity amount of 30.01 million yuan. Jiangsu Galaxy Property was established in 2000 with a registered capital of 30.01 million yuan and is 100% owned by Suning Real Estate Group Co., Ltd.
An ancient business experience
When other housing enterprises are waiting to be fed and break their arms to survive, why can Country Garden's service be so "local tycoon", crazy to buy and buy? It's not that it's rich, but it can raise money!
Since its listing in 2018, Country Garden Services has rapidly completed four fundraisings, and the amount and speed have also shaken the entire industry from time to time.
In January 2019, Country Garden Raised HK$1.939 billion in the placing of 169 million shares. On 27 April, 28 April and 1 June 2020, Country Garden Services issued convertible bonds with net proceeds of HK$3,838 million "intended for future potential mergers and acquisitions, strategic investments, working capital and general corporate purposes". In December 2020, Country Garden Services again raised HK$7.75 billion in allotments. In May 2021, at the same time as the acquisition of Blu-ray Gerber, Country Garden issued convertible bonds for the third time and simultaneously raised a total of HK$15.526 billion.
In the three years since its listing, Country Garden Services has raised HK$29.09 billion from the capital market.
While financing wildly, harvesting wildly, behind it is an ancient business experience that is not complicated: buy low and sell high.
Since its listing, due to the market's high expectations for its growth, the valuation of Country Garden's services has not been low, and the dynamic price-earnings ratio is more than 40 times when the stock price is the lowest and more than 60 times when it is high. The allotment of shares and the issuance of convertible bonds at such valuations allow for higher financing amounts at a smaller equity dilution consideration.
Taking the recent financing in May as an example, the issue price per share is HK$75.25, which is 76 times the price-to-earnings ratio of 76 times based on the earnings per share of 0.98 yuan at the end of 2020, and the price-to-earnings ratio of the issuance is also 54 times based on the half-year earnings per share of 0.7 yuan this year. As a result, Country Garden Service only issued 139 million shares, an increase of less than 5% in shares, and received financing of more than 10 billion Hong Kong dollars.
On the other hand, whether it is Blu-ray Gerber, R&F Property or the latest color life, the acquisition price-earnings ratio is only more than ten times.
The acquisition of Blu-ray Gerber corresponds to a net profit of 13.5 times the price-to-earnings ratio in 2020 and an estimated net profit of 9.5 times the price-to-earnings ratio in 2021. For the acquisition of R&F Property, according to the performance commitment, Furang Global deducted a non-attributable net profit of not less than RMB500 million, and the first phase of the transaction consideration was RMB7 billion, corresponding to its 2021 price-earnings ratio of 14 times. The acquisition of Neighborhood Music has a net profit of 309 million yuan in 2020, and the purchase price of 3.3 billion yuan corresponds to a price-earnings ratio of less than 11 times.
According to the statistics of China Fund News reporter, as of October 27, there were 53 property management companies listed in Hong Kong under the Hang Seng tertiary industry classification, excluding 3 loss-making enterprises, with an average dynamic price-earnings ratio of 18.69 times and a median close to 18.4 times. Obviously, Country Garden's acquisition of three property companies has picked up a lot of bargains.
In the view of a private equity fund manager in Guangzhou who is well versed in market value management, this buy-and-sell is a good business with empty gloves and white wolves, but the premise is that "the market must recognize". "This kind of mergers and acquisitions-driven play, A shares in 2013 to 2016 is very popular, typical of the provincial Guangzhou Group and LeTV, low price-earnings ratio acquisition, the net profit is larger, the capital market chasing the outlet and giving a high price-earnings ratio, the market value is inflated at once," the fund manager told the China Fund News reporter.
Two major concerns emerged
On the road to becoming the "first housing enterprise in the universe", Country Garden's ability to manage and control products obviously cannot keep up with the speed of enterprise expansion, and "high turnover" has led to various quality problems and rights protection storms emerging in an endless stream, and in 2018, it was pushed to the forefront of public opinion due to frequent collapses.
In the process of rapid expansion and reaching the top of "the first property enterprise in the universe", the quality of service and management of Country Garden Services have also hidden dangers, and the uncertainty of profitability is also increasing.
According to the data of Tianyancha, Country Garden's services have accumulated 1615 lawsuits, most of which are property dispute cases, either Country Garden services suing owners or owners suing Country Garden services. In 2020 alone, there were more than 500 lawsuits, more than the three years combined in 2017-2019, and more than 300 in the half year of 2021.
In July and August this year, a series of major accidents occurred in a certain community in Guangzhou of Country Garden, which aroused widespread concern in public opinion.
On July 7, Caixin reported that the property personnel drowned in the reservoir incident in the South China Country Garden Community in Guangzhou, and the property owner closed the sluice gate and cleaned the pool within a few hours after the drowning incident, but did not inform the owner of the real reason. Nearly a week later, the community residents confirmed the drowning accident from the police, triggering panic about the safety of drinking water.
In this regard, the South China Country Garden Property Service Center issued the "Explanation on the Incident of the 100-meter Pool in cuishan blue sky on June 28", saying that according to the water quality test report issued by the Guangzhou Institute of Water Science, the water quality indicators of the pool meet the national drinking water sanitation standards. He also said that if the technical conditions permit, try to use the method of direct water supply and no longer use the pool involved.
On August 6, the Guangzhou Panyu District Emergency Management Bureau released a note on its official website entitled "Emergency Handling of the "8.2" Drowning Accident in Nancun Town". At about 18:30 on August 2, 2021, a 7-year-old boy in the pool of The Garden Club in South China accidentally drowned while playing in the shallow water area of the pool (water depth of about 30cm), and was sent to the hospital by 120 to rescue him, because he was sucked by the pool drain and could not move. The owner pointed out that such safety accidents in the pool of the community have occurred many times, and just 10 days before the accident, there was also a drowning incident in the same location.
For leading property enterprises, it is not difficult to expand the scale with capital with their own credit, but expanding the market with brand and service quality is the long-term way. Zhu Baoquan, CEO of Vanke's property management company Wanwuyun, said in a recent interview with the media, "When running wild on the road of scale expansion, becoming bigger does not necessarily bring brand accumulation, and it is a false proposition not to talk about the brand's service industry mergers and acquisitions." ”
Another problem with rapid scaling is the decline in profitability. The gross profit margin of R&F Property acquired by Country Garden Services in September was low, with the gross profit margin of basic property management being only 14%, and the gross profit margin of commercial property management being 32%, while the gross profit margin of Country Garden Service Property Management was 33.38% in the first half of 2021. Color Life's semi-annual report shows that its overall gross profit margin is 32.6%, which is slightly lower than Country Garden's services, and these newly acquired subsidiaries are bound to have an impact on the gross profit margin of Country Garden's services.
In fact, in 2020, the gross profit margin of Country Garden Services in the Urban Services Segment decreased by 6.2 percentage points to 32.5% from 38.7% in 2019, due to "the lower gross profit margin of the acquisition of Manguo and Dongfei businesses during the year, the gross profit margin of the "Three Supplies and One Industry" business decreased by 6.4 percentage points to about 7% due to the high cost of investment in facility maintenance during the year, and the gross profit margin of community value-added services decreased slightly".
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