Summary. COPL achieved 12.5% 1H19 soft growth in 1H19. We expect margin to recover in 2H19. We revise up our TP from HK$3.33 to HK$4.10. Maintain HOLD.
- Soft 1H19 growth. In 1H19, revenue increased by 25.9% to HK$2,400mn. However, gross margin dropped from 27.7% in 1H18 to 20.1% in 1H19. Margin decline was mainly attributed to the service reform started in 2018 and came into effect in 2H18 thus, leaving 1H18 as a high base. Measures of service improvement include (i) realignment of the human resources allocation structure during 2018 that certain back office supporting staff were assigned to front line and (ii) increase in direct deployment of project-level management personnel. As a result, gross profit declined 6.4% YoY. On the other hand, SG&A to revenue improved from 12.6%/8.3% in 1H18/FY18 to 6.4% in 1H19. EBIT was up 13.3% YoY. Net profit accordingly grew 12.5% to HK$248mn.
- Signs of margin recovery. EBIT margin (1H19:14.7%) has recovered from 2H18 compared to 16.4/10.7% in 1H18/2H18. We expect it will continue in 2H19. Furthermore, growth of topline, mainly property management, was better than we expected. Given a low base in 2H18, we expect a faster YoY growth in 2H19.
- Passive attitude towards VAS. Since 2H18, the Company has started the car parking spaces trading business and believed the business is valuable to its property management segment. Thus, the Company would continue to expand it. The new business segment “car parking spaces trading business” has been separately disclosed since 1H19. Furthermore, revenue from pre-delivery services, move-in assistance services, delivery inspection services and engineering service quality monitoring, as well as advertisement income were reallocated to VAS segment in 2019 from property management services segment. But in fact, car parking spaces trading business is not a new business model. Other peers have already involved in the car parking space. COPL is lagging in VAS compared to peers. As a listed subsidiary of China Overseas Holdings, we expect COPL to slowly develop its VAS to avoid unnecessary operation or reputation risk. Quality of property management service is the focus.
- Raise earnings forecast, maintain HOLD. Due to better-than-expected property management segment growth and sign of margin recovery, we revise up our FY19/20 earnings forecast by 7.7%/10.3% to HK$539/665mn. Subsidiary of Poly Development (600048 CH, BUY), Poly Property Management is preparing for H-share listing. Uniqueness of COPL (large SOE backed) may be weakened then, which further affects its valuation. We give our TP based on 25x FY19E P/E, or equivalently 20.3x FY20E P/E, thus we derive our TP at HK$4.10. Maintain HOLD.
