Property Downturn Undermines Onewo in Run-up to Hong Kong IPO

Key Takeaways:

Property management firm Onewo, which is boasting high-tech elements, could become the largest IPO in Hong Kong this year
Underperformance by its industry peers has undermined company’s chances of getting a strong valuation

By Emily Chan

It’s boasting high-tech credentials, as it aims to make what could become Hong Kong’s largest IPO so far this year. But the property management arm of one of China Vanke Co. Ltd. (2202.HK; 000002.SZ), one of the country’s top developers, is being hobbled by a sagging real estate market.

Vanke is the latest in a growing list of Chinese developers spinning off their property and space management services divisions, with its Onewo Inc. headed to market afterpassing its listing hearing earlier this month. The company reportedly plans to raise at least $2 billion, which could make it the biggest fundraiser in Hong Kong this year if it the final figure is more than the $2.1 billion raised by CTGroup Duty-Free (1880.HK; 601888.SH) in its listing last month.

Onewo’s preliminary prospectus shows it has three main businesses: residential and community space living consumption services; commercial and urban space integrated services; and services involving artificial intelligence internet of things (AIoT) and business processes as a service (BPaaS).

The first two, which cover traditional residential and commercial property services and urban space integration services, are the company’s main revenue sources, contributing more than 90% of the total in recent years. The newer AIoT and BPaaS services are a more recent addition, mainly providing remote space technology operation services.

Last year Onewo’s revenue reached 23.7 billion yuan ($3.4 billion), up 30.6% year-on-year. Its residential property services division, the biggest contributor, had 660 million square meters of floor space under management. By comparison, industry leader Country Garden Services (6098.HK) recorded 2021 revenue of 28.84 billion yuan and had 766 million square meters of residential property under management.

Missed window

Vanke launched its property management services arm in 1990, but is a relative latecomer in the spin-off wave for such divisions of the past few years. The first indicator that it planned such a move came in October 2020, when the company’s name changed from Vanke Property Management to Onewo.

But the spinoff has progressed slower than most, causing the company to miss the best window for listing as stock market sentiment weakened and China’s property market stagnated after years of explosive growth.

The property management IPO wave began with the 2014 listing of Color Life Services Group (1778.HK), the property management arm of Fantasia Holdings (1777.HK). The larger Country Garden Services arrived at an ideal time, listing in June 2018 by way of introduction at an opening price of HK$10, before hitting a high of HK$85.20 with a market capitalization of more than HK$280 billion ($35.9 billion) by June last year. Some believe Onewo could have recorded an even strong performance if it listed at the same time.

But with property prices now slumping and many projects remaining unfinished, investors have cooled to property management stocks. As of Sept. 13, the Hang Seng Property Services and Management Index was down about 60% over the past year. At its Wednesday close of HK$15.40, Country Garden Services now trades at less than one-fifth of its peak.

Despite the headwinds, Onewo’s determination to list may be for the sake of its parent whose business has stumbled lately, similar to many of China’s top developers. Domestic housing construction and sales have been stuck in a major rut since the second half of last year, resulting in numerous unfinished homes whose buyers are now refusing to pay their mortgages. That’s putting pressure on the developers to finish their projects and get the market moving again.

Vanke is a case in point. The company’s revenue rose just 8% last year to 452.8 billion yuan, as its net profit plunged 45.8% to 22.5 billion yuan. In a move that looks timed to let an offspring come to the rescue of its ailing parent, Onewo submitted its listing application the day after Vanke submitted its abysmal annual report in March.

Despite strict government measures to rein in speculation in the domestic real estate market, Onewo still managed to post more than 30% revenue growth in the past two years. But its net profit growth shrank from 44.2% in 2020 to just 12.9% last year, as its cost of sales continued to rise on growing staffing and subcontracting costs. It’s also worth noting the company suddenly paid a 3.5 billion yuan dividend in 2021 before its IPO, twice as much as its profit for the year.

Vanke currently holds 57.12% of Onewo’s shares, with another 5.77% held by its affiliated companies. Its other shareholders include Boyu Capital, 58 Tongcheng and Linzhu Group. Last year’s high dividend, combined with dividends of 247 million yuan and 318 million yuan from the previous two years, have brought Onewo’s total dividends to more than 4.1 billion yuan over three years, close to its profit of 4.27 billion yuan in the same period. With 62.89% of the Onewo’s shares, Vanke has been the biggest beneficiary of that largess.

Big on tech

Against the backdrop of weak stock market sentiment and an industry downturn, Onewo is being forced to find a more compelling story to attract investors and boost its IPO valuation. It believes it has such an edge in its use of technology. The preliminary prospectus shows funds from the IPO will be used mainly for business expansion, to develop existing AIoT and BPaaS solutions, and acquire or invest in upstream and downstream supply chain service providers.

Applications covered by Onewo’s current AIoT and BPaaS solutions mainly cover monitoring for vehicle violations, garbage identification, garbage cans overflowing and other community management issues, which are relatively low-tech. What’s more, AIoT- and BPaaS-related revenue was only about 500 million yuan in this year’s first quarter, accounting for just 7.3% of total revenue, up just slightly from 5.8% of the total in 2019. It seems the company’s “transformation story” to a high-tech play still needs some time to materialize.

To estimate how Onewo might be valued, we can refer to forecast price-to-earnings (P/E) ratios for peers Country Garden Services, China Resources Mixc Lifestyles Services (1209.HK) and China Overseas Property Holdings (2669.HK), which range from 9.5 times to 40 times. Taking the average of 25.8 times, Onewo would command a market value of just HK$33 billion ($4.2 billion), based on its estimated profit for this year. Even if it can do better in terms of valuation, market expectation for raising $2 billion or more may be out of reach, scuttling any hopes that Onewo may be able to take Hong Kong’s IPO crown for 2022.

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