Hong Kong-listed S-Enjoy Service Group Co (SES) is a real estate services company based in China. The company derives its revenue primarily from two businesses — 60% of the total revenue comes from property management services, while 40% comes from value-added services, which cover developer-related, community-related, and smart community services.
The case for SES is that the company is expected to recover from an underwhelming year and downturn in the general property market in China. At current prices, the company is undervalued with good yields, with business and financial fundamentals are intact. The year-to-date and one-year total investment returns for the company are –36.3% and –43.6%, respectively, denoting that the company trades significantly cheaper.
Many reasons support a recovery in the Chinese real estate industry, which should improve the company’s business performance. Firstly, the waning effects of Covid-19 have brought work, production, consumption and entertainment closer to pre-pandemic and normal levels. The Chinese government has also been continuously issuing policies to open financing channels to support the development of the real estate industry, indicating the worst for the industry has passed.
SES’s business strategy has shifted to focus more on logistics services, gradually decreasing its exposure to the real estate development industry. The property services provided are much more comprehensive, as services are not only provided to property owners but to production, study and work scenarios, which diversifies the company’s revenue and earnings sources. SES has invested resources into information infrastructure, such as its SAP system, which is expected to speed up the generation and analysis of data and eventually generate greater value for both the business and shareholders.
SES’s balance sheet is solid, with good liquidity represented by a current ratio of 1.6 times. Cash and cash equivalents are the largest item in the assets list, covering roughly 60% of the total liabilities. Based on our worst-case scenario of balance sheet projections assuming a heavy discount to the company’s assets, our revalued total assets to total liabilities is at 1.61 times, indicating that the company has a surplus of assets to return to shareholders if it winds up. The company is also net cash.
Regarding valuations, SES trades at a steep discount compared to peers. Relative to domestic and regional peers, the company trades at a significant 35% and 40% discount, respectively, for its forward P/E, 64% discount for its forward EV/ebitda, and 23% and 24% discount, respectively, for its forward P/B, indicating that it is a very cheap pick-up.
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The actual yields have become more attractive, with the company’s share price declining significantly. Dividend yields are one such example, and given that the company is net cash, dividends are likely to be consistently returned to shareholders. At current prices, a dividend yield of 3.3% is relatively more attractive than China’s risk-free rate of 2.8%.
There are 11 “buy” calls, two “hold” calls and one “sell” call for SES with a target price of HK$8.43 ($1.43), over 40% of its current trading price of HK$5.82. Based on our in-house valuations, we think the company is worth at least 20% above its current trading price, including dividend returns.
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