Hopefluent
Group has a long history as a public company, having listed its shares since July 2004 in the Hong
Kong Stock Exchange where it raised HK$50M in IPO. Hopefluent is co-founded in
Guangzhou by the husband & wife team, Mr. Fu Wai Chung & Ms. Ng Wan and
Ms. Fu Man, sister of Mr. Fu in 1995 and has been engaging mainly in the
property agency market in China, earning commissions from primary (new property
launches) and secondary (resale market) property transactions. Over the years,
Hopefluent has increased its market territory from Guangzhou to more than 150
China cities and has set up around 400 branches around China to scale its secondary
property real estate agency service business. It also has further expanded its
business scopes to provide financial services & property management
services and started a full time R&D department to design and promote
various Internet products that can support the online-to-offline operations of
its business segments. Since IPO, its profits attributable to shareholders has
grown from HK$26M in 2004 to HK$302M in 2016, a whopping 11.6x!
The business segments of Hopefluent can be divided into:
Primary property real estate agency is the provision of first hand real estate services to property developers.
Secondary property real estate agency is the provision of secondary real estate services.
Financial services is the provision of mortgage referral and loan financing services to individuals or companies.
Property management is the provision of building management services to property owners and residents.
In
2016, the group handled over 1,000 property launches in more than 150 cities.
Through the years, Hopefluent has become the close partner of renowned
developers such as Sun Hung Kai Properties, Vanke, Evergrande, Poly, China
Resources Land, Citic, Kingold, China Merchants Property Development, R&F
Properties, Agile Property, KWG Property, Star River, Gemdale, New World China
Land and Country Garden. The Group is continuing its efforts to expand its
customer base and services and secure more agency projects in different
regions, reinforcing its leading position in China’s property service market.
Given the prevalence of internet technology, Hopefluent has also
integrated mobile network and online financial services with its traditional
service so as to improve the operational mode of the industry and create room
for sustainable development, thus ultimately providing more comprehensive
services to customers.
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| Hopefluent Revenue and Profitability |
With the urbanization and growth of property market in
China, the revenue and profits of Hopefluent have grown at a CARG of 22%p.a.
and 13%p.a. since 2009. Notably, the segment profit from Financial Services
business that was started in 2015 has growth from HK$22.6M to HK$62.6M in less
than two years. The steadily growing Property Management business also provides
a stable stream of income to smoothen out the vagaries of the property market
cycles.
The share price of Hopefluent has been going sideways for quite a
while. This could be attributable to the investors’ lingering concerns on the
property cooling measures that the China Government might be imposing due to
the persistently fast rising property prices in China cities. In first half of
2017, some China cities have introduced measures to curb property speculations
and this have resulted in drastic drop in the number of property transactions.
So
does that spell the end for property agency companies like Hopefluent?
Well,
it should be commonly known that Governments across Asia, often intervene the
property markets to prevent the risks of market overheating by introducing temporary cooling measures like minimum holding period for
property before resales, buyers & sellers stamp duties, restrictions on
mortgages etc. But no government with sanity would want to crash its property
market by creating unnecessary control measures. When the property prices
slowed or corrected, those restrictive measures on property transactions would
most likely to be lifted.
In
the long run, the growth of the property prices should correlate to wealth of
the people and economy of the country. Given China economy is still growing and
its population of middle class increasing, one would expect that there will be
continuing demand for properties going forward. Hence, the number of property
transactions in China is likely to normalize once the cooling measures are
lifted in due course.
On a separate note, Hopefluent announced on
30th June 2017 its plan for a possible listing of its Property
Management business in A Share market. This spin-off of its Property Management
business could be aimed at accelerating its growth as a more independently run
listed entity, as well as for Hopefluent to realize its value of investment in
this business.
Valuation:
(Based on
December 2016 Financial statements)
Share price
as at 1st August 2017: HK$3.16.
Exchange
rate RMB/HKD: 1.16
1. Financial Position
Net Cash
value per share: HK$2.13
Net Book
value per share: HK$3.57
2.
Discounted Earnings Method
(using
discount rate of 4% for 10 years)
Base Case:
(a) assuming
zero growth: HK$3.32
(b) assuming
5%p.a. growth: HK$4.10
3. Relative Valuation Method
The table
below compares various financial matrix between Goldpac and its close
competitor, Shenzhen World Union (002285) listed in Shenzhen Stock Exchange.
At a single glance, one might think that
Hopefluent might seem inferior in terms of OP margin and ROE. However, with
double digits for OP Margin % and ROE, the operating matrix of Hopefluent is
still respectable, considering that 60% of its book value is made up of net
cash. More importantly, it is trading at a significantly lower valuation than
Shenzhen World Union which is more than 4 times its PE and 6 times its book
value. In fact, the ex-cash (net) PE for Hopefluent is less than 2.5x as
compared to 25.2x for Shenzhen WorldUnion.
With strong operating cashflows, Hopefluent
has been able to generate high level free cashflows in the recent few years.
As Hopefluent has announced its plan for
a possible listing of its Property Management business in A Share market, it
might worth a look at a simple calculation on how this business might be valued
by examining the valuation of similar listed companies.
Using an average PE of 25x for similar
companies listed in HK, and assuming the PAT of Hopefluent’s Property
Management business at HK$38M in 2016, this business listing is potentially
worth HK$950M and quite likely a listing in A share market is likely to fetch a
higher valuation than in Hongkong market due to scarcity of such listed companies
there. Based on HK$950M, it is around 45% of Hopefluent’s current market
capital of HK$2,111M or adds about HK$1.42 value per share to its book value.
Earnings
Growth Catalysts:
Continue growth of China’s economy, urbanization and middle class size would simulate the demand for housing
Lifting of property cooling measures in China cities
Risks:
Prolonged property market downturn
Erosion of commission margin on property agency business due to competition or regulation changes
Increasing credit risk exposure from its financing business
Conclusion:
Hopefluent is trading at great value judging
from its high net cash position and discount to book value and its ex-cash
(net) PE for Hopefluent is less than 2.5x.
If zero to 5% growth in net earnings is
assumed for the next 10 years, then it should trade at around HK$3.32 to
HK$4.10.
While World Union is trading at 28.9x PE,
if we assume a more conservative PE of 10x, Hopefluent should then be valued at
HK$4.5
From
the above table, based on the different assumptions used for valuing
Hopefluent, we get a discount to current share price of 5.1% to 57.9% or an
average of 29.6%.
Since the announcement of the A Share
listing plan for its Property Management business, Mr Fu and Ms Ng, the two
co-founders and Directors of Hopefluent, whom collectively owned more than 36%
of the company, had bought shares in Hopefluent from open market aggressively,
spending a combined HK$8.4M to acquire 2.778M shares at price ranging HK$2.795
to HK$3.184 in the month of July 2017. This amount represented 1.72x their
combined annual income as Executive Directors/employees of the company.
Company’s Directors and Management team
tend to deeper insights into the company they run. Are these share pruchases a signal
that the co-founders think Hopefluent is undervalued? Or are they increasing
their shareholdings as counter-measure to corporate takeover (about 64% shares
of Hopefluent are held by non-Fu family)?
Notably, Soufun (NYSE:SFUN), a New York Exchange listed company
operating real estate internal portal in China, had subscripted for 91M new
shares at HK$3.00 in July 2014 for a potential collaboration and partnership in
internet and real estate financing businesses. This shareholding has since subsequently
been increased to 111.9M or 16.76% through open market purchases, but there
seemed to be little mention of the progress in the cooperation between the two
companies. The question is what does Soufun intend to do with such a huge shareholdings in
Hopefluent?
