A month after China Evergrande sold a $3 billion stake in its property management spin-off ahead of an IPO, competing developer Sino-Ocean Group announced plans to seek a separate Hong Kong listing for its services arm.
Sino-Ocean Service Holding Limited, the property management unit of Chinese developer Sino-Ocean Group, submitted a prospectus to the Hong Kong Stock Exchange on 7 September, without indicating a valuation for the company or setting a target for fundraising. Citigroup and mainland investment bank CICC are joint sponsors for the IPO.
The filing by Sino-Ocean, which this year fell out of the ranks of China’s thirty largest developers, joins a rush of Hong Kong property management listings by mainland developers as equity raised on the HKEX jumped 56 percent in the first half of the 2020, fuelled by a surge in liquidity in mainland China and record traffic over the exchange’s link with its Shanghai counterpart.
An upswing in purchases of Hong Kong-listed shares in mainland companies has helped 11 Chinese property management companies who completed listings in 2019 to enjoy an average 86 percent increase in their stock value during 2020. In early August, top five mainland developer Sunac China Holdings announced that it too would join the property management IPO wave.
Spinning Off Services
Just incorporated in the Cayman Islands in April of this year, Sino-Ocean Service Holding managed 210 properties with a combined construction area of 42.3 million square metres (455 million square feet) by the end of June, according to the prospectus.
Sino-Ocean’s property management business achieved revenue of RMB 90 4 million in the first half of this year — an annual increase of 6.6 percent over the same period in 2019. Revenue relevant to the spin-off grew tp RMB 1.83 billion in 2019 which represented an increase of 12.6 percent over the RMB 1.6 billion achieved a year earlier.
The company’s 2018 revenue marked a nearly 25 percent increase over the RMB 1.2 billion it took in during 2017.
From 2016 through 2018 Sino-Ocean had listed its property management business on Shanghai’s New Third Board exchange as Ocean Yijia, before buying back the spun-off entity two years ago due to what it said was a lack of investor activity. In 2016, when Sino-Ocean Land Holdings rebranded as Sino-Ocean Group, the subsidiary of state-owned shipping giant Cosco had ranked among China’s top ten developers.
China’s Property Management Sector Booms
According to James Macdonald, head of research for Savills China, growing demand for property related stocks not dependent on fluctuating home sales numbers has supported the trend toward spinning off property management operations from mainland developers in recent years.
“Property management firms are attractive at the moment given their comparatively stable returns and the possibility to increase productivity and profitability through proptech advancements,” Macdonald said.
“Spinning divisions off also enables them to pitch for work for third parties while also raising new capital to grow their business and make new investments.”
The popularity of property management stocks has been evident on the Hong Kong exchange this year. Nanjing-based Yincheng Life Service saw its stock price jump more than five-fold since the beginning of 2020, while Zhong Ao Home Group’s stock price also tripled.
In addition, local news reports that China’s six property management firms representing a current market value of more than HK$7 billion saw their stock prices increase an average of 135 percent this year.
Similar to most of the property management firms which have spun off from developers n China over recent years, Sino-Ocean Service’s income is mainly derived from its parent company. According to the prospectus, most of the property management service contracts of Sino-Ocean Services came from properties developed by Sino-Ocean Group.
|Year||SQM Managed (mil)||% of Inc From Parent||Revenue (RMB mil)||Annual Revenue Growth|
|Source: Sino-Ocean Group|
The prospectus showed that in 2017, 86.5 percent of Sino-Ocean’s property management income came from contracts with Sino-Ocean Group. While that reliance had decreased to 71.6 percent by the end of June this year, the diversification of the company’s property management contracts may also be related to declining revenue growth.
Sino-Ocean Service Holding has achieved a 100 percent success rate in bidding to manage properties managed by Sino-Ocean Group, the prospectus shows, despite charging its parent firm higher rates than it does for third-party clients.
In 2017 the average monthly property management fees collected by Sino-Ocean Service from projects within the group were around RMB 3.7, with that rate having climbed to RMB 4.1 per square metre by this year.
For properties developed or owned by third parties, the company achieved rates of around RMB 1.5 per square metre in 2017 with that number having climbed to just RMB 2.0 per square metre this year.
According to the prospectus, Sino-Ocean Group holds 90.1 percent of the company’s equity as the controlling shareholder. The rest is owned by Wealth Best and Smart Estate, two recently established investment management firms owned by directors and senior members of Sino-Ocean Group. Following a listing, Sino-Ocean Group intends to retain at least a fifty-percent stake in the services firm.