CICC: Preliminary Exploration of Investment Value Analysis Framework for Property Management Operators

CICC released a research report stating that shopping center assets themselves possess characteristics such as high entry barriers, high operational professionalism, and stable rental income. In recent years, some top domestic developers have increased their investment in holding shopping center businesses, thereby creating a certain safety cushion for their balance sheets amidst market fluctuations. However, in actual transactions, there are different core valuation contradictions for companies in different forms and stages of growth. The valuation levels of different commercial management operators can be divided into three categories: mature holding companies, transition development + holding companies, and growing light asset companies. Key points of CICC are as follows: Analysis of the value of individual shopping centers: Gradually realize long-term value under stable rental income. Initial investment in shopping centers is relatively heavy, with IRR usually in the mid to high single digits, and long-term stable operation is the premise for recovering costs. However, top-tier shopping centers are expected to achieve the Matthew effect on the operating side, and the rigid part of the cost structure provides operating leverage, allowing premium assets to realize a long-term upward cost-benefit curve and stable profit return. In terms of valuation, the average capitalization rate for shopping centers in first-tier cities in China is around 4-5%, which is equivalent to pricing related assets in the primary market at 20-25 times net operating income. Sources of value for shopping center asset portfolios: Long-term internal growth as the anchor. In the past 5 years, the domestic shopping center market has rapidly expanded, with outward expansion being an important source of growth for top commercial management operators. However, in the long term, considering the limited number of prime locations in core cities, internal growth will gradually become the dominant factor in company growth. In fact, the number of new shopping malls opened by top companies in 2022-23 has decreased by 23% compared to the average from 2019-21. Rental growth data for malls open for more than 10 years has shown that over an extended time period, differences in asset quality and operational capability will lead to differences in levels of internal growth. Commercial management operator map: Diverse underlying assets and corporate forms. Based on underlying assets, commercial management operators differ in terms of scale, city layout, and product line composition, but overall, this market is diverse and has low concentration (CR10 about 15%). In terms of corporate forms, heavy asset management companies are represented by the "heavy holding" model in Hong Kong and the "sell-and-lease" model in mainland China, while light asset management companies represent innovative models in China, independently pricing the operational management capability of shopping centers. How to measure the valuation levels of different commercial management operators? The differences in valuation levels of different commercial management listed platforms are significant. Taking CHINA RES LAND as an example, its implied asset value for investment properties and implied price-earnings ratio for recurring profits are significantly undervalued compared to Hua Xia Huarun Business REIT and CHINA RES MIXC. Although net asset value (NAV) of on-hand assets should be the anchor of intrinsic value for commercial management operators, in actual transactions, there are indeed different core valuation contradictions for companies in different forms and stages of growth. It is suggested that for mature holding companies, anchor dividend yield to measure cost-effectiveness, and in this process, consider risk premiums based on asset management conditions and dividend stability; for transition development + holding companies, the core valuation contradiction currently lies in development business, and the stabilization of development market quantity and price forms the basis for independent revaluation of commercial management business value; for growing light asset companies, one can consider the composite return of profit growth and dividend yield using the price-earnings ratio. Risk warning: Unexpected downturn in the consumer market leading to lower-than-expected internal growth for commercial management companies; competition pressure leading to lower-than-expected operational performance of newly opened shopping centers.