Listed on the Main Board of the Hong Kong Stock Exchange since 2005, Agile Group Holdings Limited (Agile) is primarily engaged in the development of large-scale property projects. It also has a sizeable presence in hotel operations, property investment, property management and environmental protection.
- Property Development
As of 31 Dec 17, the group has an attributable land bank of 34.1m sqm and an average land cost of RMB 2.4k psm. ~33% of land bank is in the Greater Bay Area (GBA) (>11m sqm), which we believe should be sufficient for 3-5 years of development at a relatively low average land cost of ~RMB2.8k sqm. The group also has more than 17% of its land bank (~6m sqm) along the Yangtze River Economic Belt, at an average land cost of ~RMB 5.1k sqm.
In 2017, the group acquired 7.46m of total attributable planned GFA, representing an addition of more than RMB130b of saleable resources at an average land cost of ~RMB 4.7k psm. The group has continued to push for more land in the GBA and the Yangtze River Economic Belt, with the two regions comprising 45.2% and 31.3% (excluding Agile Dream Lake Fairy Hill Changzhou) of attributable acquired GFA in 2017. The group has also acquired more tourism property, and entered into Jinan, Kaifeng and Xiamen.
- Property Management: A-Living
A-Living, a subsidiary of Agile, is a property management service provider in China focusing on mid to high- end properties, serving both property and non-property owners (primarily property developers). Services are largely focused on property management services such as security, cleaning, greening/gardening and repair/maintenance services to property owners, residents and property developers, as well as consultancy services to local property management companies.
The group has successfully completed the spin-off and separate listing of A-Living on HKEX in Feb 2018, while still retaining a 54% stake in the entity. As at 31 Dec 2017, A-Living manages 78.3m sqm in 69 cities, serving more than 1 million residents. A-Living also acquired a wholly-owned subsidiary of Greenland Holdings Group Company Limited (Greenland Group) for RMB 1b in June 2017, and subsequently inducted Greenland Group as a strategic shareholder, with the latter taking up 15% of A-Living. Over the course of 5 years, Greenland Group will be providing A-Living with at least 10m sqm of GFA for property management per annum.
- Environmental Protection
The group’s environmental business is engaged in providing services in three primary areas: environmental restoration (e.g. water ecology, soil restoration), solid waste treatment (e.g hazardous waste, domestic waste) and water treatment (e.g industrial waste water). As at 31 December 2017, the group has 23 environmental protection projects (21 waste treatment plants and 2 water plants) located in regions including Beijing-Tianjin-Hebei, Shandong, Eastern China, Southern China, Central and Western China and Hainan, with the planned annual processing capacity of hazardous waste disposal and waste water treatment amounting to 1.55m tonnes and 194k tonnes, respectively.
The group is also involved in various aspects of construction, with a focus on design consulting, general construction contracting and materials trading, landscape construction and home direction, with the eventual aim of becoming a service operator that covers all processes of real estate development.
Agile Group Holdings Limited (Agile; 3383 HK) has heavy exposure to the Greater Bay Area, which we believe could serve as a re-rating catalyst on the back of expected policy announced related to the region soon. The group has also set a manageable pre-sales target of RMB100b for 2018, and eventual sales could surprise on the upside. Valuations are currently undemanding, while the counter trades at an attractive forward yield.
- Exposure to the Greater Bay Area and Hainan
- Expect an upside surprise due to conservative pre-sales guidance
The group has set out a 3-year plan, which involves attaining 30% revenue growth per annum, with net profit margins at around 12%. This should be supported by the group’s ~RMB 600b worth of total saleable resources (based on our estimates). We believe that ~RMB 50b will be set aside in FY18 for land banking activities, with another RMB 10b used for other investments.
Looking forward, management has set what we believe to be a manageable target of RMB110b of pre- sales, representing a growth of ~22.6%. This should be supported by what we believe to be ~RMB180-200b of saleable resources set aside in 2018. As a result, the implied sell-through rate is ~55%-61%, which should be achievable. While some of Agile’s peers are projecting more aggressive sales, we believe that management could be selling projects that involve a smaller portion of JV/associates, thus explaining the apparent disparity.
Separately, we note that management is projecting 8.54m sqm GFA of new starts, and 16.7m sqm GFA under development for 2018, which represents YoY growth of 36.7% and 53.1%, respectively. This does suggest to us that management’s targeted pre-sales growth of ~22.6% is somewhat on the conservative end of the spectrum, and the final figure could surprise on the upside. We also believe that management also has the option on relying on more M&A to acquire land as opposed to open tenders, given the prohibitive levels seen in some of the open exercises. We believe that about a third of the group’s land banking budget was spent on M&A in 2016, and that figure has increased to about half in 2017.
We are positive on the group’s heavy exposure to the GBA, given that structural improvements are afoot. As at 31 Dec 2017, Agile has ~33% of land bank (>11m sqm) in the GBA, which we believe should be sufficient for around 3-5 years of development. Specifically, the group’s GBA presence is concentrated around satellite cities like Zhongshan and Huizhou, which should be supportive to prices. Prices (like those in Zhongshan) are already growing at a fast pace, which we believe is reflective of the increasing connectivity within the GBA. Excluding Hong Kong, the group’s average land cost in the GBA is relatively low at ~RMB 2.8k psm on the back of historical land banking activities.
The group also has substantial exposure to Hainan island, especially in Lingshui. In light of recent developments, some have seen such an exposure as a double-edged sword.
On the other hand, enthusiasm for property in Hainan island has resulted in the recent introduction of provincial-wide property restrictions. This includes requiring non-Hainan residents producing proof of at least one family member paying taxes or social insurance for 24 months or longer in Hainan, as well as making 4 core areas (Wuzhishan, Baoting, Qiongzhong and Baisha) only available for purchase by local residents. From what we understand, this has been a dampener on Agile’s sales in Hainan. Even so, the group has already secured RMB 8b of sales in Hainan for Jan-Apr’18, while still maintaining their FY18 target of RMB 13b of sales island-wide. As we understand, management still has sufficient flexibility to alter their scheduled launches in various cities across Hainan in order to meet this target.
On the other hand, these policies are a response to the effervescence in the market, stemming from what we believe to be positive longer-term structural developments being pursued by the central government. In mid-Apr’18, President Xi announced a decision by the CPC Central Committee to support the building of Hainan into a pilot free trade zone. Xinhua has further reported that China is aiming to make the free trade port system and operational mode of Hainan ‘more mature’, and an investment fund to support Hainan’s development of a free trade port will be set up. It was also separately reported that horse racing would be encouraged and sports lotteries will be expanded in Hainan, which could boost tourism. Hainan will also adopt more open duty-free shopping policies, increase the number of international flights and prioritize tourism. These structural positives should help put Hainan on the path of increased and sustainable economic development, which should benefit Agile’s longer term sales, notwithstanding the recent speed bump.
In 2017, Agile clocked ~RMB 17b of pre-sales from the Hainan Clearwater Bay project, representing around 19% of the total pre-sales value. 2017 also saw the group clock 62% pre-sales gross profit margins for this project, with ASPs north of RMB 20k psm and average land cost under RMB 400 psm. From what we understand, even after the implementation of the recent restrictions, current average ASPs are still at ~RMB 28k psm, which should still provide a level of cushion for margins despite the softer sales environment.
Strong earnings projected; contracted sales could surprise on the upside
Recurring income to support earnings
As a corollary to its “1+N” development strategy, the group expects to be able to diversify its revenue base, achieve a mix of 4:1 in terms of its property to non-property contribution. We view this positively, as this strategic move would provide a buffer against regulatory uncertainties in the property development arena. The group would likely focus on its property management, environment, construction and education businesses. Also, we believe that some of these businesses could be mid-term candidates for spin-offs, following in the footsteps of the group’s spin-off of A-Living. In our opinion, the construction and environment pieces could be the next candidates.
Financial Historicals and Forecast