Greentown Service Group:Robust Business with Sustainable Momentum.Upgrade to BUY

As we expected, Greentown Service reported robust 2017 interim results, with net profit rising strongly by 44% YoY to RMB180.6m, although EPS grew only 1.6% to RMB6.4 cents due to the dilution effect after the IPO in July 2016. The Company continued to deliver strong growth in GFA under management and reserve contracted GFA (+35.9% YoY), which could be a pillar for future growth. The performance of value-added services was also surprisingly solid. We expect the margin contraction to be temporary. Given its huge reserve contracted GFA (equivalent to 114% of GFA under management), we are confident that the strong earnings growth should be sustainable for the next few years. We upgrade to BUY and raise our TP from HK$4.80 to HK$5.65 after rolling forward the base year to 2018. Our TP implies a 25x 2018E PER with a PEG of 0.95x of EPS CAGR between 2017E and 2019E.

Inv es tme nt Hi ghl i ghts

Core Business Remained Strong. The Company’s core property services business continued to perform well, as revenue grew 29.8% YoY to RMB1.53bn in 1H17, in line with its GFA growth of 28.6%. GFA under management reached 117.5m sq. m at the end of June 2017, and reserve contracted GFA reached 134.5m sq. m, up 35.9% YoY, sus-taining the growth momentum. Given that reserve contracted GFA is likely to start contrib-uting revenue to the Company in 4-5 years time, we are confident that the earnings growth will also be maintained in the next few years.

New Value-added Services Take Time to Mature. Community Living Services wit-nessed surprisingly good performance, thanks to measures like strengthening the proper-ty agency business and introducing cultural and education services. Segment revenue grew 122.46% YoY to RMB353m and also contributed RMB126m of gross profit (30.7% of the total). Notably, as the Company offered new products and services during the peri-od, segment GPM was down from 45.4% to 35.8%. We note that some services, such as nursery schools will take a longer time to realize profit, but given the overall revenue and volume growth, the impact on the Company’s GPM should be manageable, as shown by the 2017 interim results.

Well-Positioned to Mitigate the Impact of Market Consolidation. The consulting ser-vices segment witnessed slower growth, as leading property developers, with their market share growing rapidly, have their own consulting teams. However, Greentown Services has mitigated the problem by sourcing other clients, such as auto 4S outlets. We view this as one example of the Company’s resiliency and adaptability. With RMB1.9bn in net cash on hand, we believe an acquisition would be supportive to the Company’s future earnings as well.

We are more confident in the Company’s long-term prospects. As the interim results were in-line with our expectations, our 2017E-2018E EPS estimates are largely un-changed, while we lift our 2019E EPS forecast by 4% to RMB0.26. Even though 2017E EPS growth will be affected by the dilution effect post-IPO, we believe growth will resume to normal and the strong momentum will be more visible. We upgrade to BUY after rolling forward the base year to 2018. Our TP of HK$5.65 implies a 25x 2018E PER with a PEG of 0.95x of EPS CAGR between 2017E and 2019E.