Evergrande Group – Initial Thoughts

Evergrande Group (3333.HK)

[August 28, 2019 ]

Interim Result Announcement @ Four Seasons

Background

The first time I looked at this stock was several years ago when I was doing internship in Hong Kong. Someone in the team registered the site visit but figured out the company was “not interesting” so the trip was left to the intern. I spent a day in Shenzhen, made a friend, and concluded the company was not investible. Leverage was the main concern on the long side and shorting on equity and debt were both expensive. It seemed the fund passed the stock when it traded around HKD 5-6/share. You know the price development in next one year.

The reason why I attended the meeting this time was that I feel I have some domain knowledge in real estate since I spent some time in real estate private equity.

The attendance was shocking to me (fellow investors are definitely used to it). It’s a real people mountain people sea. The company has already become so large and complicated that most questions came from the floor surrounded around macro / policy / industry (or the company answered that way).

The stock has been weak since this April. Macro / policy, leverage and new initiative might be the primary drivers.

Topics of Interest to me

The company spent a good amount of time discussing their EV business. I think it’s well known to the market but for someone who is not following the company like me I was a little bit surprised it’s doing EV. I soon realized that real estate developer leading the EV development / penetration actually makes sense to me. I think it’s more likely for a large real estate developer to deploy the infrastructure which leads to natural monopoly eventually. The company also teams up with another two large real estate developer and electricity grid provider to expand the network and gain exclusivity on the power supply side. Without intervention from future regulation, I can envision clear winner-takes-all scenario. Government will definitely regulate but before that how long it can enjoy the excess economic return and how the upfront costs look like.

The company is currently funding the EV initiative from its real estate business. To build up the EV ecosystem, real estate development will be part of plan so the company is thinking about negotiation with government to acquire land at a “cheaper price” to construct residential properties. The company views the profit generated from real estate (primarily selling residential properties and  probably operating / leasing commercial / retail properties) as a compensation of helping government build EV industry. The company expect the EV business won’t be profit making in the next five years. With the downward trend of real estate market and increasing loss when scaling up EV business, the shrinking of group level profit might be faster than the market expected and the group might be even loss making. With high leverage and increasing likelihood of group level loss, the stock price might be depressed for short to medium term.

The company even said a strategy of buy a house, get an EV for free. While it sounds funny, it’s actually a bundle that tries to acquire a customer.

Next Steps

  • Start following this company as the market dominant potential for EV is very attractive while it takes some time. We have more time to understand the industry, macro, the company and its business.
  • The stock might decline further due to the possibility to start losing money on group level and leverage concern. This might create an opportunity to build position.

 

Country Garden Service – Meeting Note 1

Country Garden Service (6098.HK)

[August 26, 2019]

Meeting Note 1 @ One IFC

Background

The company posted strong 1H2019 earnings last Friday. Reaction in the market were quite positive reflecting in stock price movement and high attendance in the meeting.

Related post: Country Garden Service – Initial thoughts

Topics of Interest

  • Maybe it’s for the modeling purpose, fellow investors focused mainly on mix of business line, their growth rates, and profitability. From their questions on full year guidance and next year trajectory, their investment horizon might be around six to eighteen months. This industry is a secular growth story. Key is adjacent markets penetration will expand the total addressable market of a simple property management company. The management team indicates that a “mature” property management company can have more than hundred of business line. Just think about how many services the company can provide to its residential owners and their community. Thus, the core of my thesis, if I eventually come up with one, would be the service roadmap and execution plan.
  • Value-added service is difficult in commercial properties. It’s a to B business.
  • Mix of net addition of ~80M sqm: parent company ~60M sqm, 3P ~17-18M net, acquisition ~7M sqm.
  • Long-term gross margin of property management on existing properties will be around 28%-30%.
  • Value-added service gross margin is +60%.
  • Different kind of regulation can be translated into a new revenue source such as recycling regulation. Some clients are willing to pay a fee for recycling. The amount might be as high as property management fee in the long run.
  • It seem the company is fine with equity financing, only selectively on channel. It prefers to bring in new strategic investors in private placement rather than public offering.
  • There’s still no progress on overseas acquisition. The concerns are mainly post-acquisition integration and the reception of Chinese property manager abroad.
  • The average household spending for its customers is around RMB 10,000/month. The company estimates that around 50% is spent on related business. The total addressable market is large and the only question is how the company plans to capture the market.

Next steps

  • It seems the company will have other roadshows this week. Maybe get more exposure.
  • Build up a simple model to organize data points later this week.

Country Garden Service – Initial Thoughts

Country Garden Service (6098.HK)

[August 24, 2019]

* Initial Thoughts *

Background

I came across this stock when reviewing post earnings release roadshow schedule. It showed up in various timeslots at different brokers’ venues. This indicates the market is interested in the stock and the company is happy to promote itself publicly.

Country Garden Service is a property management service provider and it has a related party, Country Garden (2007.HK) which is an HK-listed property developer / operator. Due to related party, there are basically two segments in Country Garden Service’s properties under management: 1st party (related party) and 3rd party. Before 1P / 3P mix becoming “balanced” in portfolio, path dependence governs the geographic cluster of properties and market segment of properties and their owners which has impact on the pricing and adoption of services offered.

Business Model

The company provides not only property management service but also property related services among daily demand and along the ownership life cycle. In addition, Country Garden Service engages in other property-related services and trajectory is to penetrate everywhere in the value network.

The business can be described as labor intensive but relatively less capital intensive. It can demonstrate economics of scale in area with high density of property under management and probably on higher geographic level. On the service side, it’s about up-sell and cross-sell to drive revenue contribution on top of basic management fee.

One of key characteristics of this business is high stickiness of customer. Generally, property owner is less likely to change property manager as the switching cost is high. The customer relationship gets deeper as time goes by. Low churn rate and cross-sell / up-sell opportunities will lead to healthy net dollar retention on property level. Long lifetime real estate and the net dollar retention will translate into impressive customer lifetime value. When you have a related party that is doing property development, you probably won’t spend a lot on customer acquisition. CLTV/CAC should be very attractive.

Company Specific before Meeting Management Team

  • I like their presentation. It seems the company has put some efforts on it.

Next Step

  • Basically, every leading property management player should be able to adopt similar business model. So why Country Garden Service? Maybe there are other more attractive targets. This needs a comp analysis.
  • What is the real customer experience? If actually reception is bad, the strong stock price development might attract short sellers with reports distributed.
  • See if I can meet the management team next week.
  • Not sure if on-site visit is needed.

* Related Posts After This *

[2019/8/26] Country Garden Service – Meeting Note 1

Eslite Xinyi

Today, I went to Eslite Bookstore in Uni-President Int’l Building in Taipei. I spent roughly an hour there and decided to buy a few books. Then, I turned to books.com.tw (not associated to Eslite) where I’m pretty sure I can get better price to order books and expect to pick up the parcel at 7-ELEVEN close to my place. I don’t know how many people do this but it’s quite natural for consumer to enjoy book discovery provided in physical store but to place order at place where it has price advantage.

The business model of this physical marketplace operation is rent arbitrage. Using the bookstore as the anchor to attract traffic, operator leases the marketplace from landlord and collects fix rent and turnover rent from other retail and F&B tenants. Opportunity cost of in-house anchor (Eslite bookstore) can be considered as costumer acquisition cost for overall marketplace. As I can feel clear business leakage in anchor’s operation, I’m not sure whether the operator figures out how to monetize lead generated to the online bookstore or tries to capture the economics of order flow. (books.com.tw opened in 1995 and the marketplace started the operation in 2006)

The most ironic is that Uni-President Group is not only the landlord but also has economic interests in the online bookstore and 7-Eleven.

圖片1

Tainan Market Analysis

This post is an exercise on the analysis of market share, occupancy, and average daily rate as a supplement to the previous post (Stabilization in Hotel)

Market Snapshot & Competitive Market Defined

In this exercise we choose lodging industry in Tainan City, Taiwan as our target market. Tainan City is located in southern Taiwan and famous for being the oldest city in Taiwan with rich history and traditional street food.

To analyze market share, we need to first define what the market is by figuring out competitive position of each relevant facilities of interest and deciding which hotel to be included in the competitive market (understand the reason as well).

Taiwan Tourism Bureau has hotel categorization for administrative purpose in addition to 5-star rating. The categorization is shown below:

  • International Tourist Hotel (國際觀光旅館)
  • Standard Tourist Hotel (一般觀光旅館)
  • Hotel (旅館業)
  • B&B (民宿)

As of June 2018, there are six international tourist hotels (1,429 rooms), one standard tourist hotels (40 rooms), 265 hotels including 21 properties without permits (10,194 rooms),  and 217 B&Bs including 3 properties without permits (776 rooms). In total, there 12,439 rooms supplied per day by regulated lodging facilities in Tainan.

Taiwan Tourism Bureau collects and discloses individual high-level operation statistics from five international tourist hotels in Taiwan.

  • Tayih Landis Tainan (Tayih Landis)
  • Evergreen Plaza Hotel Tainan (Evergreen Plaza)
  • Shangri-La’s Far Eastern Plaza Hotel, Tainan (Shangri-La Far Eastern Plaza)
  • Crowne Plaza Tainan (Crowne Plaza)
  • Hotel Tainan

Due to the limitation on data access, we only focus on the international tourist hotels in Tainan. Hotel Tainan is excluded from competitive market participant universe because its different market positioning reflected in lower ADR compared to other hotels.圖片14

In addition, Crowne Plaza Tainan is not included in the competitive market because the latest annual data is 2017 and it just opened in September 2017. In fact, the Crowne Plaza Tainan will be the subject hotel for stabilization and other analysis later on. The owner of Crowne Plaza Tainan secured loan syndication from banks to acquire land, construct and decorate the hotel in 2013 so later we will do an exercise on feasibility study by using data before 2013 and see what might make our analysis go wrong with the benefit of hindsight.

When determining competitive market, the analyst should identify all relevant lodging facilities. Due to information availability, some competitive hotels might be neglected in this study because they are technically not categorized as a tourist hotel so their detailed operation data will not be disclosed. Some hotels might be primary or secondary competitors of any hotels in the our defined competitive market universe. Below is the list of potential competitors:

  • Silks Place Tainan (a brand of Silks Hotel Group)
  • The Place Tainan (a brand of Royal Hotels & Resorts)

The map below illustrate where three hotels in the competitive market are located.

圖片1  [Map of Tainan City]

Historical Occupancy & Market Share in Competitive Market

Shangri-La’s Far Far Eastern Plaza started with a trial run on November 22, 2008 and opened on Mar 23, 2009. The hotel added around 330 rooms to the market. The increase in room supply and global financial crisis had less impact on Evergreen Plaza while Tayih Landis’s occupancy decreased by 17 percentage points in 2009.圖片4

The chart below shows that Shangri-La Far Eastern Plaza gained market share from other two competitors and that it roughly took five years for the demand (estimated by number of rooms occupied) to absorb the room supply with market occupancy stabilized at around 73%.

圖片3

Competitive Position

While the market share can be easily calculated by number of rooms occupied, it is not very intuitive to determine the competitive position only with market share information. This is because the number of rooms to be occupied in each hotel is constraint by the number of rooms supplied by that hotel . A hotel with 100 rooms running at full capacity has less market share than a a hotel with 200 rooms running at 60% occupancy. Thus, to determine the competitive position, we need to take room supply into consideration.

[Market Penetration Method]

The market penetration is calculated by dividing the actual market share by fair market share. The rationale behind fair market share calculation is that under competition process, market share captured by each hotel should be the same as the proportion of room supplied by each hotel to overall market supply.

圖片5

The relative competitiveness between Evergreen Plaza and Tayih Landis can be calculated by dividing market penetration of Evergreen Plaza (1.06) by that of Tayih Landis (0.97).

[Competitive Index Method]

The competitive index simply shows the number of days per day a room is occupied in the hotel. The relative competitiveness between Evergreen Plaza and Tayih Landis can be calculated by dividing competitive index of Evergreen Plaza (282.1) by that of Tayih Landis (256.9).

圖片6

[Relative Competitiveness]

Both competitive index method and relative competitive method will yield the same relative competitiveness.

圖片7

Applying Competitive Index Method to Evaluate Relative Competitiveness of Entrant Facility to Market and Forecast Resulting Occupancy

[Evaluate Relative Competitiveness of Entrant Facility]

Due to the limitation of data access, market segmentation like leisure, commercial, and group & meeting is not available. Taiwan Tourism Bureau collects data of number of guests categorized as free individual travels (FIT) and group so we use this categorization as market segment.

With the market segment information, the competitive index can be further broke down into FIT and Group. For example, a guest room in Shangri-La’s Far Eastern Plaza is occupied by FIT guests for 207.9 days and by guests traveling in group for 57.3 days annually.

圖片8.png

 

Next step, we gauge relative competitiveness of Crowne Plaza (Subject Hotel) by comparing with existing hotels (benchmarking). Shangri-La’s Far Eastern Plaza is more comparable to Subject Hotel because both of them are international brands (Crowne Plaza is a brand under IHG) and might have similar pricing strategy. For instance, Crowne Plaza might trace Shangri-La pricing pattern. We estimate that the Crowne Plaza’s FIT  and Group competitive index are roughly 90% of Shangri-La’s due to the location difference. Crowne Plaza is located in the outskirt of Tainan while Shangri-La is located in the center of Tainan. Adding up two market segment competitive indexes, the Crowne Plaza’s estimated competitive index is 245.

圖片9

[Forecast of Resulting Occupancy ]

A reminder: conceptually, the resulting occupancy estimated here is different from stabilized occupancy in the competitive market.  It’s a occupancy rate for each hotel in the competitive market after the inclusion of the subject hotel which capture a share of existing demand and latent demand. The market will start a dynamic adjusting process toward the stabilization.

Table 5 below shows the room-night demand before the inclusion of Crowne Plaza in 2017. It’s based on the split between number of FIT guests and Group guests. Latent room-night demand for FIT and Group segments are estimated as 10% and 5% of total accommodated in each segment respectively. The total demand from FIT segment and Group segment in the competitive market are room-night of 178,910 and 65,360 respectively.

圖片10

Table 6 shows the calculation of market share in FIT segment after the inclusion of Subject Hotel.

圖片11

Table 7 shows the calculation of market share in Group segment after the inclusion of Subject Hotel.

圖片12

Below shows the projected occupancy for each hotel in the competitive market after the inclusion of Crowne Plaza in 2017.

圖片13

Note that the projected occupancy is different from stabilized occupancy. The competitive dynamics in the market and demand reaction to the dynamics will adjust occupancy to the long-term stabilized level. While the stabilized level might change after the inclusion of new property, the best estimate on the occupancy level might be the one before inclusion the new property.

As shown in the previous chart, Number of Rooms Occupied & Market Share, the average occupancy rate between 2013 and 2017 was around 73%. The market occupancy during this period of time (5 years) was stable enough for a stabilized occupancy estimate.

The following chart is a occupancy comparison between actual and what we forecast for first half of 2018 (after the inclusion of Crowne Plaza).

圖片15

As Crowne Plaza is still in the build-up stage, the actual occupancy rates for incumbents are higher than what we forecast and the one for Crowne Plaza is lower than the prediction for the first half of 2018. That said, the overall occupancy is in-line with the forecast. It might be that dynamics in the market takes more time to adjust so that the actual occupancy for each hotel would be closer to the forecast. We will revisit this after annual data is released.


[Preview of Next Post]

*A Case Study*

As we have done the exercise on the market analysis, we are ready to do a case study on market forecasting for a hotel development as part of the feasibility study. The subject hotel is Crowne Plaza Tainan and the timing of forecasting is set in 2013 when the hotel development company secured a syndication loan of NT$ 1.9B with the maturity of ten years.