Hopefluent: Significant Insider Buying. Is There Hope in Hopefluent?

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:

1. Primary property real estate agency is the provision of first hand real estate services to property developers.
2. Secondary property real estate agency is the provision of secondary real estate services.
3. Financial services is the provision of mortgage referral and loan financing services to individuals or companies.
4. 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.

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 30^th 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 1^st 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?

For new posting alert on this blog, please click on the link below:

Subscribe to Hunting For Value by Email

New Post:
12 September 2017 - Hopefluent: Profit Increased 32%, Chairman Continued To Buy Shares After Half Year Results