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3698 6392 E [email protected] 王志文 T (852)

3698 6317 E [email protected] Company Note LifestylesChinaMarch 29,

2019 Powered by the EFA Platform Insert Insert Colour Life Services Group Industry giant lagging in its valuation

2018 results were in line with our expectations as EPS was up 18% YoY to RMB0.37. Consolidating Wangxiangmei (WXM, or Wanda PM) will still be a key driver, in our view, as it allows the Company to tap into areas with higher margins. We expect its core business to continue to grow moderately. Additional upside for near-term earnings growth will depend on how fast it can lower its debt level. Maintain BUY with our TP raised to HK$6.55, based on 12.5x 2019E PER. Despite EPS dilution, strong

2018 earnings after acquisition Colour Life (CL) acquired WXM in Feb

2018 with a mix of debt and share placement, and the deal boosted earnings significantly. Gross profit, a fairer way to view the Company'

s performance without the distortion of accounting treatment, was up 76% YoY to RMB1,282m. Net profit attributable to shareholders was also up 51% YoY to RMB485m. Since there was a share placement, EPS was up only 18% YoY to RMB0.379. CL proposed a DPS of HK$0.18, equivalent to a 42% payout ratio. Core management business lifted by the WXM acquisition In 2018, as CL acquired WXM, one of the largest property managers in China, it took on a considerable amount of GFA. Contracted GFA and revenue-generating GFA were both up ~27% YoY to 554m/352 sq.m. respectively. As WXM is positioned as a high-end manager with a lot of high-margin business, the overall gross profit of the property management segment recorded strong growth in

2018 (+84% YoY). Strong value-added services may continue in 2019E by exporting Meanwhile, as CL has been continuously improving its Caizhiyun APP and exporting it to external parties, the value-added services segment recorded 96% YoY growth in gross profit to RMB391m in 2018. This is reflected in the growth in the number of APP registered users and active users, which were up 155%/298% YoY to 26m/14m, respectively. We expect growth in the number of users to remain strong in 2019E/20E, as more small property management companies are using the platform developed by CL. But we are more conservative on the margins, as CL still prefers to grow the user base by offering generous promotions in the form of management fee rebates. GFA growth in 2019E could be relatively moderate without M&

A On top of M&

A, CL has acquired minority stakes in small companies to export its platforms and APP as its growth engine. We expect this to continue, but we do not expect a large-scale acquisition in the near term. Therefore, we believe management'

s guidance of organic GFA growth of 40?50m sqm in 2019E is reasonable, but this only translates to high single-digit growth for its GFA under management in 2019E. Based on valuation, it is still a laggard Our latest EPS forecasts for 19E/20E are RMB0.45/0.55 respectively, implying 20%/21% YoY growth. We expect CL to lower its net gearing from 30% in 18A to 16% in 19E, but the finance cost will still be material at RMB243m in 2019E, accounting for 16% of its gross profit. The debt level could be an overhang for the Company but we believe the concerns are largely reflected in the low valuation relative to its peers. Therefore, we maintain our 2019E target of 12.5x. We lift our latest TP to HK$6.55. Maintain BUY, as we see it as a value play in the sector. SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG Hong Kong BUY Consensus ratings*: Buy