It has been a while since I published on this blog, but here is today's write-up about Greentown Management. The company came to light by Andrew Rosenblum from Bonsai Partners. After I saw a new position of Greentown in his portfolio and the small write-up in his quarterly letter, I was convinced to do more research. Some of his work is copied but a lot of additional information has been added by myself. And here's the result. Enjoy!
[Yes, these signs stand for Greentown]
To better understand Greentown management, it is important to know about its parent company: Greentown China.
Greentown China is China’s 8th largest residential property developer[1] with a focus on building high-end luxury homes. Greentown ranks first overall for quality[2] and customer satisfaction[3]. Greentown China’s reputation for high-quality construction may sound inconsequential but, in China, there is a general lack of construction standards which leads to a significant amount of low-quality construction. A widespread lack of trust exists between homebuyers and developers, which turned Greentown into an aspirational brand within multiple high-value regions of China. Greentown is particularly well regarded in the northern coastal regions of Zhejiang, Jiangsu, and the Bohai Rim.
Like any other property developer, Greentown China is asset-heavy and cyclical. They created separate asset-light entities to support their growth aspirations that aren’t as cyclical: Greentown management and Greentown service.
Greentown China’s management realized their strong brand could also be used to deliver high-value real estate services in buildings built by outside developers. This avoids the need for additional capital to drive growth. Greentown Service offers outsourced property management services, while Greentown Management focuses on residential construction project management. Both businesses leverage the Greentown brand, which delivers confidence to property buyers that their new home is either well-built or will be well maintained in the future.
Greentown Service was spun out as a separately listed company in 2016, and Greentown Management spun out in June 2020 with Greentown China still holding 73% of the shares.
Company description
Greentown Management is the leading provider of outsourced construction project management services in China. This means Greentown Management partners with landowners who lack construction expertise to help them build high-quality apartment complexes. Their customer base represents a mix of small and medium-sized developers & landowners, financial institutions that took over failed construction projects, as well as government entities. They had a 22.0% market share in 2019, as opposed to 11.6% and 11.3% for its biggest competitors: Landsea and Central China.
For the projects where Greentown Management is called on, the company brings their project design and project management expertise, a network of reliable contractors and financial partners, sales support, and finally, their brand. On this last point, most developments they work on end up adopting the Greentown name to aid in the sales and marketing process. The Greentown brand signals to customers that the property was built according to Greentown’s exacting quality standards. In exchange for these services, Greentown Management earns management fees from each project rateably over its life (typically 3 to 6 years). Rather than invest significant sums into land and construction, Greentown Management puts little to no capital into each project and simply earns fees tied to project costs, revenues, and profitability. This model is highly cash generative and asset-light as a result.
In a hypothetical example, a small landowner that owns 100 acres of land and wants to develop apartments, likely does not have the know-how to deliver a high-quality project and earn a high return on its own. Greentown Management helps landowners increase quality through better designs, aids in sourcing critical financing (due to their close relationships with financial institutions), identifies and negotiates with contractors to control costs, and offers the Greentown brand, which ultimately acts as a signal of quality and trust to potential buyers. Buyers tend to pay more for apartments they perceive as higher quality, and Greentown branded homes sell for considerably higher prices than comparable units as a result. This last element is key, as it ensures that not only customers benefit from Greentown Management’s involvement, but the developer also realizes an improved return on their investment.
Greentown Management focuses on delivering increased benefits to all parties within the residential construction development process compared to those who “go it alone.” A landowner earns more per development, an apartment buyer gets better living conditions, backing financial institutions gain assurances against clear quality standards and project timelines, the Chinese Government can push its agenda of affordable high-quality construction, and Greentown Management earns a reasonable return. As long as Greentown Management keeps its ecosystem partners happy, their business is protected from potential disruptions.
The company’s asset-light model; high revenue growth visibility; and exposure to the less cyclical government project management segment make it more defensive to the volatilities in the physical housing market.
Today, Greentown Management is the market leader for the outsourced construction project management due to its heritage of quality and its head start incubating the industry. Greentown Management first pioneered this business model over the past ten years and today enjoys between 25% to 30% market share.
Fees received for commercial project management projects (72% of revenue)
Basic fees for personnel, including their salary and employee benefits
Consultation and management fees based on (i) an agreed percentage of the sales value of the property, (ii) the GFA of the projects managed, (iii) the profit from the project, or (iv) a combination of the preceding models
Discretionary incentive bonus based on performance
Market opportunity
In developed economies, roughly ~20% of new residential housing construction uses outsourced construction project management, while in China, that figure sits at around ~2-4% today[4]. According to China Index Academy, by 2024, construction project management could be used in nearly 5.5% to 14.7% of all new GFA, reflecting a 24% CAGR on average.
This is likely to happen because small- to medium-sized developers and non-developer project owners want to strengthen their competitiveness against leading developers and the increasingly intensified competition of small- to medium-sized developers amid the continued market consolidation, especially in times of property downturns which makes Greentown Management countercyclical.
Even if China only reaches a 10% penetration level over the medium term, this represents a significant growth tailwind before ever considering the underlying growth of the development market itself.
With intensified competition in the sector (market concentration into the biggest 100 developers has doubled in the past 6 years) and higher requirements for cash flow management, it is becoming increasingly difficult for small and medium-sized property developers to survive and gain market share due to high property development costs, weak product capability and low brand awareness. Partnering with project managers allows these small developers to ‘borrow’ those things and compete better.
The industry is expected to develop from the introduction stage to the growth stage with more leading developers expected to penetrate the industry. While this will dilute the market share of the existing top players, the rising recognition of the value of project management services will effectively stimulate demand from the small- to medium-sized developers and non-developer project owners. As the market size expands, the leading players will be able to drive solid growth through their strong project execution.
Competition
Landsea (11.6% market share), Central China (11.3%), Agile (6.2%), Gemdale (4.3%) are Greentown’s biggest competitors. Given that Greentown has a well-regarded brand name as well as 10 years of expertise, will prevent these competitors from taking the customers from the company. Greentown is, because of its advantages, the preferred property manager and will continue to take on clients, especially in a market that is expected to grow at 24%.
Competitive advantage
First of all, Greentown management is wearing the Greentown name. As said before, through its parent company it has established a brand name of quality and trust. Something that’s not easily replicated by new entrants. This brand name allows the developers that work with Greentown management, to sell their property for a premium over other properties not developed by or with the help of Greentown. Its commercial projects have approximately a 40% pricing premium to nearby projects and a 30% pricing premium to top developers' nearby properties.
As the earliest, largest project management company in China with an independent corporate operation, the Company has accumulated over 10 years of project management experience and possesses a complete knowledge system for knowledge, brand reputation, and supplier system accumulation. It might take at least several years for new competitors to acquire as well.
Management
Li Jun has been the CEO of Greentown management since 2016, owns 0.65% of the company–about $5.8 million worth today.
Mr. Li joined the Greentown Group as an officer in the quality management department in 2002 and subsequently served as a department manager in its operations management department since 2009. He has served as general manager of Greentown’s first commercial project management project since 2010 and innovated the asset-light development model. He has also served as president of the Group since 2015, responsible for overseeing daily operation and management.
In 2018, Mr. Li received the Annual Innovative Leader Award in China granted by Boao Real Estate Forum. In 2019 and 2020, he successively received the Most Influential Business Leader in China's Real Estate Industry.
Guo Jiafeng has been the Chairman since January 2020. He has more than 33 years of experience in the industry, and has extensive experience in project development and construction, and served as executive director at Greentown China for 10 years. Currently, Mr. Guo also serves as an executive director and executive president of Greentown China.
Zhang Yadong is the Chairman of Greentown China as well as the non-executive director at Greentown management.
On 24 December 2020, the company granted an aggregate of 35,740,000 shares, representing approximately 1.825% of the issued share capital, to 45 selected participants, including 3.9 million shares for Li Jun, 2 million for Guo Jiafeng, and 2 million for Zhang Yadong. Management's interests can be linked with company growth.
On the other hand, the total share count has increased at a CAGR of 21%. That’s a lot. They don’t need that money to operate. As a result, the company has one-third of its market cap in cash. The first thing that comes to mind when piling up a lot of cash is acquisitions. Something I need to have an answer to. So hopefully, the Investor Relations of Greentown Management can help me with this important question.
Culture
Employees
“The Group provided diversified training and personal development plans to its employees according to established human resources policies and systems. The remuneration package offered to the staff includes basic salaries, allowances, bonus, share award scheme, and other employee benefits, which was in line with their duties and the prevailing market terms. Discretionary bonuses based on individual performance will be paid to employees as recognition of and reward for their contributions. Staff benefits, including pension, medical coverage, and provident funds are also provided to employees of the Group.” – 2020 annual report
Financials
Greentown management has compounded sales at 30+% per year before the pandemic with a ROIC of above 30% as well. The gross margins have shrunk from 55% to 50% and operating margins from 30% to 26%. The company has a lot of money on its balance sheet and generates significant amounts of FCF.
Future expectations
I expect that the project management market will grow significantly in the coming years because of the intensified competition in the property development industry, and competition will enter the project management market, as a result. This will cause some of Greentown’s margins to shrink but Greentown will remain the industry leader because of its build-up expertise and huge brand name.
Risks
- Greentown’s failings to stay the number one best provider for the industry and competition taking clients from the company as a result.
The company has proven that it has the capabilities to capture the biggest market share. The Greentown parent company as majority owner, which has significant inside ownership, is determinant to keep Greentown management on top.
- A macro slowdown and property tightening in China.
This should result in more competition for property developers and, therefore, should increase the demand for property managers like Greentown Management to differentiate themselves from the competition and being able to sell to as many homes as fast as possible.
- Uncertainties on government projects and policies
Of course, uncertainties are always present, especially governmental uncertainties that are visible in China. China has been focussing on providing as much value as possible to the people of China instead of to corporations. And building quality houses is a significant contributor to increasing the value given to the people. So, I’m quite sure that there will be no long-term issues for Greentown management regarding government projects and policies.
Current valuation
The company is expected to grow sales at 20% per year or higher, with operating earnings growing at 18% or higher. This all is available for you at 7.6x EV/EBIT. That’s very cheap.
I think that Greentown management is going to catch up with the missed revenue from the pandemic and realize some fast revenue growth in the first few years. I also choose a moderate multiple of 13 to be conservative, even though the company is the market leader and likely to stay leader as well.
This gives us a margin of safety of 60% and an expected return between 26% and 32%.
Summarized:
With continued market consolidation among Chinese developers, this will translate into rising demand for project management services from small to medium-sized developers and project owners.
With a strong brand, sufficient pipeline, and good track record, Greentown Management is favorably positioned to sustain its leading position.
The asset-light business model, high revenue visibility, and exposure to the less cyclical government project management segment make the company more defensive.
“We believe Greentown Management can maintain its market leadership, with market share increasing from 22% in 2019 to 30% in 2025, due to 1) abundant GFA under management that secures around four years revenue; 2) quality commercial projects with around a 40% pricing premium to nearby houses; 3) a recognized brand, extensive experience and a network of qualified contractors and suppliers; and 4) involvement in government projects.”
- UBS research coverage 21 April 2021
[1] Ranking of Real Estate Developers by Sales, 2020 (CRIC)
[2] China's Real Estate Product Quality Ranking 2020 (CRIC, China Index Academy)
[3] China Index Academy Research
[4] China Index Academy
So, that has already been my fourth write-up. I hope you enjoyed reading it and, most important of all, learned something interesting about Greentown Management and the property management market in China. Please, let me know what you think of this post in the comments.
Furthermore, I have some finished write-ups about Etsy and Mo-BRUK that will probably be posted soon.
Thanks for reading and hopefully until next time!