Jinmao Services becomes the latest property manager to spin off from its parent company

Key points to remember:

  • Jinmao Services launched a Hong Kong IPO to raise $106 million, with plans to use the funds for acquisitions
  • The company is the latest property manager to spin off from its development-focused parent, capitalizing on China’s property boom of the past two decades.

By Ken Lo

Another day, another Chinese property developer spun off its property management arm into a standalone unit to fend for itself.

The latest in this trend is China Jinmao Holdings Group Ltd. (0817.HK), which announcement last Friday that he peeled his Jinmao Property Services Co.Ltd. (0816.HK) for listing on the main board of the Hong Kong Stock Exchange. The IPO process began the same day and ended on Wednesday. Jinmao Services is offering 101 million shares at a price between HK$7.52 and HK$8.14, aiming to raise up to HK$825 million ($106 million). Its commercial debut is tentatively set for March 10.

Jinmao Services provides high-end property management and urban management services, with approximately 36.4 million square meters of space under management at the end of last year. Of this number, 64.4% were residential properties and the remaining 35.6% were non-residential.

Its parent company, China Jinmao, owns 67.5% of the company. Most of the rest is owned by the Sinochem Group, which sees China Jinmao as the property development arm of its sprawling business empire.

According to his prospectus, Jinmao Services generated 1.05 billion yuan in revenue in the first three quarters of last year, representing a year-on-year increase of 57.6%. It made a profit of 109 million yuan, double the level of the previous year, with its profit margin rising from 8% to 10.4% during this period. Much of the improvement is due to growing contributions from more profitable value-added services such as consulting, planning and design services as well as post-delivery real estate services.

Spurred on by new government-imposed restrictions designed to cool the property market and limit corporate debt, many developers have separated their property management arms and made them public to raise funds and separate the two types of businesses. At the same time, the broader real estate development and management sectors are also consolidating through mergers and acquisitions as companies fight for more market share to boost their economies of scale.

The policy restrictions have seen Beijing introduce “three red lines”, capping developers’ asset-liability ratio at 70% and their net asset-liability ratio at 100%, and setting a minimum short-term cash-debt ratio of 100%. China Jinmao’s interim financial statements for the first half of last year put these ratios at 69%, 52% and 126%, respectively, within these three red lines.

Much appreciated

So why are developers like Jinmao Holdings, whose own finances are sound enough, rushing to publicize their property management weapons? We can look for answers in the prospectus, which indicates that Jinmao Services plans to use the funds raised for acquisitions and other means to achieve greater economies of scale, as well as reduce dependence on projects of its parent company. We’ve seen this kind of logic before in previous listings, and it seems to still hold true for the Jinmao property.

In fact, 92.5% of Jinmao Services’ revenue in the first three quarters of 2021 came either from the projects of its two parent companies or from projects in which the parent companies had a stake. As of the end of September last year, 86.6% of Jinmao Property’s area under management was related to its parents, and only 13.4% was developed by independent third parties. The company said it has been actively expanding its property management business to independent third parties since 2020 to reduce its reliance on Sinochem, its biggest customer and major shareholder.

Of the modest sum the company aims to raise, approximately 55% will be used for strategic investment and acquisition opportunities related to property management, urban development or community development. Another 22% will go to upgrading the enterprise’s smart management service system and developing smart community and smart city solutions, and about 13% will go to developing value-added community services.

Jinmao Services says it will consider acquiring or investing in other companies as a controlling shareholder at valuations that fall within the price-to-earnings (P/E) range of 10 to 25 times. He added that he aims to add three to eight providers of property management or municipal services, and three to five providers of community products and services by the end of 2024.

The company’s drive to grow stems from the growing opportunities in the wider market. China’s rapid urbanization over the past two decades and growing disposable income per capita have fueled a boom in the property management industry. Therefore, the company does not want to miss the gravy train and needs more funding for future acquisitions.

According to data from China Index Academy, per capita disposable income in Chinese cities grew at an average annual compound rate of 6.9% from 2016 to 2020, reaching 43,834 yuan by the end of 2020. During in the same period, the average area under management by China’s top 100 property management companies increased 15.7% annually to 48.8 million square meters. Average earnings increased 15.2% annually to average 914 million yuan during this period.

Take 2020 for example. Average property management fees in China’s first- and second-tier cities were significantly higher than those in third- and fourth-tiers, which benefits companies like Jinmao Services that focus on high-end properties in major cities. . Jinmao Services ranked No. 2 among China’s top 100 property managers in Beijing, the nation’s capital, in 2020 in terms of high-end areas under management.

Its profit in the first three quarters of last year translates to a profit of about 146 million yuan this year on an annualized basis. Using this and a valuation of HK$6.78 billion ($868 million) to HK$7.34 billion based on its IPO price range, the company would have a P/E ratio of between 37.6 times and 40.7 times.

Two similar companies listed in Hong Kong, Country garden services (6098.HK) and Services Yuexiu (6626.HK), also manage residential and commercial properties at similar scales to Jinmao Services. Their estimated P/E ratios were 29.3x and 10.3x, suggesting that Jinmao Services values ​​itself much more than its peers and is pricing its IPO shares quite aggressively.

This may explain why his offer has so far met with a lukewarm response. As of March 1, it had only secured HK$23 million from subscribed brokers. And less than 30% of the shares available to retail investors had been redeemed, reflecting a marked lack of enthusiasm.

This article was submitted by an external contributor and may not represent the views and opinions of Benzinga.

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