Our target price for A-Living of HK$2.7 is set under a PE-based SOTP approach. Given services/fee-based and asset-/debt-light business model, we think a P/E-based valuation is appropriate. In order to reflect the diverged profiles of the three main businesses (i.e. basic services, community value-added services, developer services and city services), our valuation draws on a sum-of-the-parts (SOTP) approach. 

We value A-Living as the sum of the following parts: (i) property mgmt at HK$2.29, under 5x 25E P/E, at a 50% discount to our sector benchmark (which is based on 5-year historical average for China property management peers) due to declining contracted sales of backing developer and less proactive at M&A for market share gain; (ii) community VAS at HK$0.26, under 3x 25E P/E, at 50% discount to sector benchmark due to fluctuating margins; (iii) city services at HK$0.16, under 3x 25E P/E, on par with our sector benchmark for city service biz due to a lower margin; and developer services at HK$0 under 0x 25E P/E, due to overall market challenges and macro uncertainties, and on par with the sector benchmark. Our valuation is fair, in our view, based on A-Living’s reviving earnings growth, improving non-cyclicality and organic growth outlook.

We assign High Risk rating to A-Living shares given earnings decline, OCF pressure, sizable outstanding accounts receivables (esp. from related parties), whch may require asset take-up.

Fundamentally, A-Living 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 estimates 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 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 accounts receivable and cash collection.

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