Our target price for Ever Sunshine of HK$1.30 is set under a PE-based sum-of-the-parts (SOTP) approach. Given a services/fee-based & asset/debt-light business model, we think a P/E valuation is appropriate for the sector. To reflect the diverged profiles of their four main businesses (ie, basic services, community value-added services, developer services and city service), our valuation draws on a SOTP approach.

We value Ever Sunshine by the sum of the following parts: (i) property mgmt at HK$1.27, under 6x target 2024E P/E, at 40% discount to sector benchmark due to its transitional GFA decline in 1H23 and moderate new contracts; (ii) community VAS at HK$0.08, under 3x 23E P/E, at 70% discount to sector benchmark due to revenue as well as margin declines during its internal reposition of services under this segment; (iii) developer services at 0x target 23E P/E, at par to the sector benchmark; and (iv) city services at 3x target 23E PE, at par to the sector benchmark. The respective sector benchmarks were derived basing on 5-year historical PE.

The target price translate into blended 5x 2024E PE, which is fair, in our view, based on Ever Sunshine's fundamentals.

We assign Ever Sunshine High Risk due to the delayed of audited annual result for 2022 (published in Sep-2023), and its change of auditor in May-2023.

Fundamentally, Ever Sunshine is exposed principally to the property market in mainland China. With regard to economic risks, any weaker-than-expected GDP growth for the global economy and/or China could negatively affect sentiment in the China property market, which could render our GFA and earnings inaccurate. Any tightening measures and policy changes by the central government with regard to property management could adversely affect its margin and cash flow. A stronger-than-expected pickup in inflation could also result in labor cost hike and pressure profitability for this labor-intensive sector.

Company-specific upside and downside risks include: (i) better-than-expected or delay in post-deal optimization of acquired targets; (ii) aggressive M&A; (iii) better/lower-than-expected margin on mgmt fee adjustment or cost hike; (iv) execution in new business areas, especially public property mgmt and value-added services; and (v) control of account receivables and cash collection.

Any of these risks could impede the shares from reaching our target price.