Hengda (Part 2): Evergrande Property Services

In Part 1 of our Hengda Group series, we provided an overview of the Evergrande conglomerate. In this second instalment of the series, we examine Evergrande Property Services, Hengda's property management arm that is also one of the conglomerate's three publicly listed supplementary business units. Evergrande Property Services is the only supplementary business unit that is in and of itself an operating segment for financial reporting purposes on Hengda's annual reports (see Part 5 forthcoming). It is also one of Hengda's more successful supplementary businesses, although Evergrande Property Services does face significant concentration risk due to its large exposure to and financial reliance on Hengda.


Hengda Series Roadmap

Our Hengda series has six parts:

  • In Part 1, we provide an overview of the different constituents that comprise the Hengda conglomerate.

  • In Parts 2 to 4, we delve into each of Hengda's publicly listed supplementary business units, with Evergrande Property Services in Part 2, Evergrande Auto and Healthcare Segment in Part 3, and Tencent joint venture HengTen Networks in Part 4.

  • In Part 5, we analyse the financial standing of the conglomerate taken as a whole.

  • In Part 6, we discuss different instances of corporate governance failures that have plagued the Group.

  • In Part 7, we conclude with some final thoughts and discussions on frequently encountered questions.

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Overview

What is Evergrande Property Services?

Evergrande Property Services is Hengda's property management arm that has been contracted to provide property management and related services to 2,443 projects in 317 cities across 31 out of China's 34 provincial-level administrative regions as of Q2 2021. In February 2021, the business unit had a total contracted area of 810 million square metres, including 450 million square metres of area under management. Of the 450 million square metres under management, 138 million are developed by third-party (i.e. non-Hengda) developers.


What Types of Properties Does Evergrande Property Services Manage?

The majority of properties contracted to Evergrande Property Services are residential in nature, although the business unit also manages a diverse range of commercial properties such as office buildings, theme parks, industrial parks, healthcare complexes, and schools. Residential properties constituted close to 99% of all properties under management by gross floor area (GFA) up until 1H2021, during which the proportion decreased to 80% as the company was able to diversify its portfolio through contracting a wide range of non-residential projects.


Based on June 2021 data, 34.9% of contracted GFA and 41.7% of GFA under management are located in the more economically prosperous region of eastern China (i.e. Shanghai and surrounding provinces), while projects in south, southwest, and central china each consist around 13% of contracted GFA and GFA under management. In contrast, the poorer regions of north, northwest, and northeast China constitute smaller shares of GFA.


Evergrande Property Services Map
Source: Evergrande Property Services 2021 Interim Report

Funding and Going Public

Evergrande Property Services received funding from high profile investors including Sequoia Capital China, CITIC Group, Yunfeng Capital (a private equity firm co-founded by Alibaba's founder Jack Ma), and Tencent, before being spun off and going public on the Hong Kong Stock Exchange in December 2020 (HKEX: 6666).


Failed Acquisition by Hopson Development Holdings

As mentioned in Part 1, Evergrande Property Services and Hopson Development Holdings (HKEX: 0754), a Guangdong-based real estate developer, both requested a trading halt of their shares in early October, citing a potential acquisition. However, on October 20th, the two companies subsequently announced that the deal did not go through, with inside rumours surfacing that Hopson Development Holdings and Hengda founder Hui Ka Yan could not reach an agreement as to where and how the acquisition money should be allocated.


Business Model

Evergrande Property Services generates revenue from three business lines:


#1: Property Management Services

Evergrande Property Services provides a wide range of property management services to property owners, residents, property developers, as well as tenants in non-residential properties under the company's management. These services include butler services, security services, cleaning services, repair and maintenance services, and greening services.


Properties developed by Hengda Group constituted nearly 100% of Evergrande Property Services's properties under management by total GFA until 1H2021, during which this number dropped to 69.3% as part of the company's diversification efforts to garner more contracts with third-party developers.


Property management services have the lowest profit margin out of Evergrande Property Services's three lines of business, but contribute to over half of the company's total revenues.


#2: Value-Added Services to Non-Property Owners

Evergrande Property Services offers property developers value-added services that cover various stages of the property development and delivery cycle, including preliminary property management services in the process of construction (e.g. construction site management and security patrol) and pre-sale process (e.g. sales office management, property tour arrangements, consulting services), pre-delivery services (e.g. cleaning and inspection of properties to be delivered), post-delivery repair and maintenance services, and property transaction services (e.g. selling parking spaces and leasing retail spaces).


Value-added services to non-property owners have relatively moderate margins and contribute between a quarter to a third of Evergrande Property Services's total revenues.


#3: Community Value-Added Services

Evergrande Property Services offers community value-added services primarily to property owners and residents. These services include community operations services (e.g. leasing out the common area in residential buildings to third-party vendors, and other services such as electric vehicle charging stations and drinking water stations), community asset management services (e.g. parking space rental services, recreation centre operations, and second-hand property transaction assistance services to help property owners sell or rent out their properties), and community living services (e.g. housekeeping, home furnishing, and repair and maintenance).


The community value-added services segment has the highest profit margin out of Evergrande Property Services's three business lines, although the segment constitutes the smallest proportion of total revenue.


Financial Snapshot

We next present and summarise the company's key financial highlights.


Total Revenue, Gross Profit, and Operating Income

In the first half of 2021, Evergrande Property Services recorded total revenues of RMB4.76 billion and operating income of RMB2.58 billion. The company's total revenue, gross profit, and operating income have been increasing year on year.


Evergrande Property Services - Total Revenue, Gross Profit, and Operating Income
Data Sources: Evergrande Property Services Prospectus, and Annual and Interim Reports

Revenue Breakdown by Business Line

The graphs below break down the company's total revenue by business line, in both raw monetary terms and percentage terms.


Evergrande Property Services - Revenue Breakdown by Business Line
Data Sources: Evergrande Property Services Prospectus, and Annual and Interim Reports