M&A activity of Chinese property management firms poised to jump this year amid rush to raise much-needed cash

15-Jan-2022 Intellasia | South China Morning Post | 5:02 AM Print This Post

The property management units of struggling Chinese developers will engage in more mergers and acquisitions to generate much-needed cash this year, analysts forecast.

Meanwhile, their healthier peers are poised to tap capital markets to raise the funds to buy some of their offloaded assets.

The number of M&A deals and the transaction value in the property management segment will jump at least 20 to 30 per cent year-on-year, according to Raymond Cheng, an analyst at CGS-CIMB Securities in Hong Kong. The total value of deals more than quadrupled last year from 2020, as distressed developers rushed to free up cash to pay maturing debt.

Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.

The rush to generate funds is also evident in the capital markets, especially among the larger players.

Longfor Group Holdings announced on Friday its plan for a separate listing of its Longfor Intelligent Living unit on the main board in Hong Kong. In November, China Vanke said it would spin off and list its property manager, Onewo Space-tech Service, in the city.

As the property market is entangled in a record slump and liquidity crisis, the acceleration of unit disposals and initial public offerings serve as a vital source of funds both for the seller usually troubled developers such as China Evergrande Group and R&F Properties and the buyer.

The once high-flying property management segment, meanwhile, is being closely watched by investors after the valuation of their stocks was halved by the end of 2021.

“This year’s IPOs are derived from the last several years’ boom of the property management industry, supported by favourable government policies,” said Tang Xiaochen, director of the property management department at the China Real Estate Information Corporation (CRIC), a consultancy. “Developers list these units to have another financing channel.”

Mounting pressure to consolidate has also stimulated larger developers to increase their M&A activities to safeguard their positions, he said. Companies with liquidity problems rushed to dispose of their property management units as financing and refinancing channels were restricted amid the slump in sales and strict government policies in China.

At least 150 such M&A deals were struck last year at a total value of 40 billion yuan (US$6.3 billion), with the number of large transactions rising, according to data from CRIC. Country Garden Services’ 10 billion yuan acquisition of R&F Property Services was the largest single deal in the sector’s history.

IPO applications by property managers also surged to a record high of 34 in 2021, compared with 19 in 2020 and nine the year before that.

Their peers’ performance in the stock markets, meanwhile, was disappointing. The Hang Seng Property Services and Management Index, which tracks the 30 largest players in the segment, had plummeted 85 per cent as of Tuesday since it was launched in April last year, according to Bloomberg data.

Although the valuations are not ideal amid low investor confidence, higher-quality property companies such as Vanke and Longfor were aiming to expand their range of financing options and boost growth of their subsidiaries.

“That means they need money to further expand their portfolio and prepare for surging M&A opportunities ahead,” said Cheng.

He expects Longfor Intelligent Living’s market capitalisation to reach $10 billion, based on 26 times its price-to-earnings level. He forecast earnings per share across the property management segment will be around 20 to 30 times in the next three to five years as the growth of the units is likely to be increasingly decoupled from the developers.

“Developers will be more cautious and their standard for ideal M&A targets will be higher in a tough environment,” Tang said. “The methods of M&A will be more versatile, they may be more likely to keep a certain stake in the property management unit to maintain their position in this segment.”

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright (C) 2022 South China Morning Post Publishers Ltd All rights reserved.



Category: China

Print This Post

Comments are closed.