1516 Sunac Services investment logic in brief
1516 Sunac Services Holdings' main business is property management, and its related parties include its parent company Sunac China Holdings and Sun Hongbin. Today, I won't go into detail about the company, but instead, I want to briefly discuss the key investment points of 1516.
- Property management is a perpetual business
Property management is different from mainland real estate; it doesn't require buying land and building houses to generate income. Basically, property management fees can be collected every year, making it a perpetual business. Therefore, its valuation is definitely higher than that of mainland real estate. It's a very good business model because even a fool can be the boss, similar to the concept of collecting rent.
- Extremely low valuation
Currently, I believe the valuation of 1516 is very low. We can look at it from several angles. First, the company has no debt, and it collects management fees every month, so we can consider the probability of this company going bankrupt to be 0.
Second, by the end of 2023, the company held approximately RMB 4 billion in cash, while its market capitalization is only HKD 6.2 billion. This means cash already accounts for about 70% of its market capitalization, which is truly exaggerated. Third, based on the core net profit of RMB 793 million in 2023, the PE ratio is around 7 times. For a perpetual business, this is already an extremely low PE. If we deduct the cash, the PE ratio is only 2 times, which is ridiculously undervalued.
- Increasing independence
1918 Sunac China Holdings has successfully completed its debt restructuring, which puts it in a better position than many property management companies. This means there's very little chance it will use 1516's funds again. Additionally, in 2023, 92% of the company's revenue came from non-related parties, meaning only 8% was from Sunac China Holdings. This shows the company is becoming less reliant on Sunac China Holdings, so Sunac China Holdings will no longer be a burden on 1516. On the contrary, if the entire real estate industry or Sunac China Holdings performs better, 1516 will definitely benefit, which can be seen as a call option.
- Light assets, high dividends
1516 currently has no debt, and its operating cash flow in 2023 was RMB 862 million, making its balance sheet nearly perfect. Moreover, the company has stated it will distribute 55% of its core net profit as dividends (not including special dividends). For example, in 2023, the company already distributed an interim dividend of HKD 0.235 (special dividend) and a final dividend of RMB 0.143. Based on a stock price of HKD 2, the ordinary dividend yield is 7.8%, and with the special dividend, the yield is about 20%!
Of course, special dividends may not be distributed every year, but the company has a lot of cash and strong cash flow, so it could easily distribute over 80% of its profits as dividends every year. Distributing 55% of core net profit as dividends is a relatively conservative approach by the company. It's possible that this year's interim results could include another special dividend, which would be a bonus, but the company definitely has the ability to do so.
Summary
Personally, I believe the worst times for mainland real estate and property management are over, and from now on, it's about being patient. I don't have much confidence in mainland real estate and don't think it will necessarily recover; just stabilizing would be a good outcome. Property management only needs to collect management fees every year, plus some value-added services, to achieve small growth annually.
The most important thing is considering the strong cash flow, no debt, and the company's willingness to share profits with minority shareholders. At the current price, with an annual dividend yield of about 8% as a baseline, it's basically a very good investment target, which is why I'm willing to build a position in it!
Disclosure: I hold 1516.
The above is my personal opinion and does not constitute investment advice.
$SUNAC SERVICES(01516.HK) $Sunac China(01918.HK) $CG SERVICES(06098.HK)
The copyright of this article belongs to the original author/organization.
The views expressed herein are solely those of the author and do not reflect the stance of the platform. The content is intended for investment reference purposes only and shall not be considered as investment advice. Please contact us if you have any questions or suggestions regarding the content services provided by the platform.
