2021 Quicktake #6: First Service Holding

When everyone is rushing for the door and we are rushing in...

We missed the run up for the property management services companies in China and we are doing a little bit of catch up here.

What has happened is that we got stuck with a bias due to looking at property management firms operating in developed countries. Their financials are hardly inspiring and when China property companies started to spin off their property management arms, we did not bother to take a further look.

Property management companies are service companies servicing the residential, commercial and industrial sector. We could not see how they could continue to generate excess returns.

Our interest only got piqued again when we saw that there is a recent busted IPO in that sector and their majority shareholder are buying (Jan 2020).

We are in the midst of reading the prospectus and taking our own sweet time when the share price recovered swiftly.

It once again caught our attention when the price dropped below HKD 1.00 in May 2021.

We started our accumulation during that time.

A few subscribers have been asking us about holdings in First Service Holding Ltd (FSH).

It is a small-capitalisation company with minimal transaction volume and I never found enough motivation or reason to do an article on it.

One of our subscriber - Michael drop me an email this morning enquiring if there is any report written about FSH.

That is when I took a cursory look at the stock market and realised that the whole Hong Kong market is down!

This is how the whole China property management industry close for the day!

Volume is robust on a down market day and we started buying some of our more familiar names (including FSH).

At the same time, I spend some time crafting my response back to Michael.

First Service Holding Investment Thesis:

FSH is in the property management space in China, operating primarily in northern China - areas around Beijing. FSH is one of the smaller players in the industry and thus their valuation multiple is much lower than their industry peers. Their margins are also much lower primarily due to their asset base being residential (industrial and commercial command higher margins).

One third of FSH business comes from property management, another third comes from ancillary service provided through the property management and the last third comes from their energy installation business at the various properties. The energy installation business seems like a one off revenue generator but from its recent press release it seems that some of these deals have revenue which are long term and recurring.

In addition, FSH is acquiring property management companies which are managing industrial assets. These acquisitions should drive earnings and profit margin growth. After these acquisitions, the property managed between their internally (from parent company) vs externally should be around 50/50.

The market should re-rate once the revenue and the margin improvements are in for the coming quarter coupled with the increased diversification of its property management portfolio.

It is a relatively new company and thus the sizing position will be small.

Actually, that is a much as I can hammer out from my memory.

This has been sitting in our draft since May 2021 and we are just glad to get it out.

For the brave hearted, you may just want to dip your toes into FSH like we do.


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