China property developers' woes cast shadow over management units

China Resources Mixc Lifestyle Services

10/08/2022 04:48

By Clare Jim and Xie Yu
    HONG KONG, Aug 10 (Reuters) - China's real estate crisis is
casting a darkening cloud over governance and financial
prospects of once highly valued property management companies,
triggering a rout in their shares and making investors cautious.
    Already battered share prices have fallen a further 7% this
month as investors have reacted to the latest instances of such
companies lending support to cash-strapped developer parents.
    "The capital market has lost confidence in some of the
property management companies, even in those companies that have
not seen misuse of funds by their parents," said UBS's head of
China and Hong Kong property research, John Lam.
    In one of the latest two cases that have unnerved investors,
China Evergrande Group  3333.HK  said on July 22 an internal
probe had found that $2 billion of funds held by subsidiary
Evergrande Property Services  6666.HK  had been pledged to
guarantee financing by the group for debt repayment.
    In the end, banks seized the money, cleaning out much of the
unit's cash. China Evergrande Group, the world's most indebted
property developer, has been at the centre of China's property
crisis, in which many such companies have defaulted as a result
of government moves to deleverage the sector.  urn:newsml:reuters.com:*:nL4N2Z32Z4
    Then on Aug. 1 shares in property manager Jinke Smart
Services Group  9666.HK  dropped 37% after it said it would lend
up to $222.3 million to parent Jinke Property  000656.SZ .
 urn:newsml:reuters.com:*:nL1N2ZD055
    As the crisis developed last year, some property management
units issued and sold shares to raise funds that were passed
back to parents. 
    Also, property manager Shimao Services Holdings  0873.HK 
bought a business from developer parent Shimao Group  0813.HK 
at an unusually high price.  urn:newsml:reuters.com:*:nL1N2SZ0Z3
    Such doings have not pleased investors. Since mid-2021,
valuations for management subsidiaries of distressed developers
have plunged from a peak of 25 times earnings to just five to
six times, according to Lam, who added that those still above
this level could come under downward pressure.
    Falls continue. Since the announcement by Jinke Smart
Services, the Hang Seng sub-index that tracks major mainland
property management companies  .HSPSM  has lost 7%, while the
broader Hang Seng Index  .HSI  is down less than 1%%.
    
    RELIANCE ON PARENTS
    William Shek, the chief distribution officer of Zeal Asset
Management Ltd, a Hong Kong-based hedge-fund manager, said his
firm had turned cautious on this sector since the beginning of
the property crisis.
    "Subsidiaries are unlikely to be shielded from risks if
their parent companies get into trouble," Shek said.
    Another concern is the dependability of property managers'
profits. Since so much of their business was providing
management services to parents, revenue was limited by how much
parents would or could pay, senior executives of two developers
told Reuters.
    Analysts noted property management companies had posted a
surge in impairment provisions for receivables in the second
half of last year. The trend is expected to worsen in results
for the first half of 2022, when more developers were running
out of cash.
    Analysts are less concerned about units of state-owned
developers, which have good liquidity positions and are subject
to strict governance requirements.
    But state-owned China Resources Mixc Lifestyle Services
 1209.HK  was targeted late last month by GMT Research, which 
estimated at least 55% of the firm's profits came from related
parties, including parent China Resource Land  1109.HK .
    GMT said the property services unit was trading at 31 times
estimated earnings for 2022 but China Resources Land would have
little incentive to support its profitability.
    China Resources Mixc Lifestyle Services said in an emailed
response to Reuters that its service pricing was transparent and
reasonable. Its market-leading valuation was driven by its
market development capability, among other things, it added.
    ($1 = 134.7300 yen)

 (Editing by Sumeet Chatterjee and Bradley Perrett)
 ((clare.jim@thomsonreuters.com;))