Our target price of HK$6.60 is based on a PE-based sum-of-the-parts (SOTP) approach. Given the services/fee-based & asset/debt-light business model, we think a P/E valuation is appropriate for the sector. In order to reflect the diverged profiles of the sector’s three main businesses (ie, basic service, community value-added services, and developer service), our valuation draws on a SOTP approach.

We value Country Garden Services as the sum of the following parts: 
(i) property management at HK$5.19/sh, based on a 9x target 2025E P/E, at a 30% discount to the sector's 3-year historical average given slower GFA growth amid less related-party support and margin reset; 
(ii) community VAS at HK$0.72/sh, based on a 5x 2025E P/E, at a 50% discount to the sector's 3-year historical average due to consecutive revenue declines amid service re-positioning; 
(iii) developer services with nil valuation due to related-party pressure;
(iv) three supplies and property management services at HK$0.49/sh, based on a 5x target 2025E P/E, at a 50% discount to the sector's 3-year historical average on lack of growth outlook and thin ROIC; 
(v) city services at HK$0.16/sh, based on a 3x 2025E P/E considering receivables pressure; 
(vi) commercial operation at HK$0.05/sh, based on a 5x target 2025E PE before more track record.


Our valuation implies blended 7.6x 2025E PE.

We assign a High Risk rating to Country Garden Services shares given the earnings decline, OCF pressure, sizable outstanding accounts receivables.

Fundamentally, Country Garden Services 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 increases and pressure profitability for this labor-intensive sector.

Company-specific risks include: (i) faster/slower-than-expected progress in securing new projects; (ii) termination or non-renewal of existing projects; (iii) better/worse-than-expected margin upon success/failure in raising mgmt fees upon rising costs; (iv) execution in new business areas, especially new ventures in 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.