Binjiang Service Group (3316 HK)
Quasi-royalty on China's Silicon Valley at 11x P/E on cyclically depressed earnings...
Introduction
This is a high-conviction call on the best undiscovered Chinese Real Estate company today. If you have not read my sector outlook and why I like the China Real Estate Services space today, be sure to check out my previous write-up here.
Binjiang Service was established in 1995 and IPO-ed in 2019. They have grown from a local residential property management service provider in Hangzhou, to one of the leading high-end property managers within Hangzhou and the adjacent Zhejiang province/ larger Yangtze River Delta area. At HKD25/share today, Binjiang Service Group trades at 11x P/E fwd, or 7.6x P/E (ex-cash) with a 6% dividend (6-years of consistent >= 60% payout), for a quasi-royalty on the best property developer in “China’s Silicon Valley”.
As per my investment framework, i always look for confluence given the higher probability of success for such set-ups, and Binjiang Service is aligned:
Macro: If we view property managers as quasi-royalties on developers (laid out here), Binjiang Service is the quasi-royalty on the best acreage in China given its foothold in Hangzhou – China’s Silicon Valley. Parent developer Binjiang Real Estate is the only private enterprise that has not only weathered the downturn but grown profitably, climbing the ranks into the top 15 property developers in China.
Micro: Best in class service innovator with strategy focused on maintaining/growing brand premium and expanding footprint in high-end properties where service quality/differentiation matters more than mere costs
Business Overview
They have 3 business segments comprising the following with respective (Gross Margins) stated:
Property management services (18-19%): security, cleaning, gardening, repair, maintenance etc. to common areas at residential and non-residential properties
Value-added services to non-property owners (30-45%): Mainly to property developers, inclusive of pre-delivery services (security, cleaning, gardening, repair, maintenance) for completed properties, consulting and community space services
5S value-added services to property owners (>20%):
‘Youjia’ -> Primary/secondary property sales, leasing agency services, car parking spaces and storage room services
‘Youju’ -> Home decoration services (customised furnishing and interior design)
‘Youxiang’ -> other differentiated services tailored to customer needs (eg. home personal care for residential)
Property management contracts are typically ~3 years long (industry level renewal rate at 97-98%, and from Binjiang’s disclosures I believe they attained 100% contract renewal for multiple years running), where the relationships are very sticky once the initial tender/contract is won. Moreover, customers are usually required to pay the next 1-year’s annual service fees in advance, which results in fantastic cash conversion as seen below.
Investment Thesis
As a quasi-royalty, Binjiang Services (de-facto duopoly within Hangzhou together with Greentown Services) offers scarce direct exposure to the best regional acreage/prime real estate in China, where Hangzhou’s rise as national tech-hub drives a virtuous cycle for growth in adjacent business activity within Zhejiang province -> urbanisation/per capita disposable income growth + population inflows -> real estate development and prices are most resilient relative to other regions through cycle
Hangzhou’s rise is the result of decades of groundwork, where the city now has a deep talent pool and industrial ecosystem. Policymakers there seem to be the most forward-looking and pro-business oriented, as captured by the excerpts below:
In the early days of China’s economic reforms, Zhejiang pioneered the “Wenzhou model”, which encouraged innovation and allowed private enterprises to flourish. When e-commerce giant Alibaba was founded in the late 1990s and faced widespread scepticism, Hangzhou’s response was to provide “cautious but firm support”.
When asked why he chose Hangzhou, Fu Pengyu, founder of robotics startup TruthEye, told the media:
“If you’ve ever started a company in Hangzhou, you’d know how much the city cares for businesses.”… Fu said the government not only helps companies connect with resources but also regularly consolidates business demands from various sectors and shares them with companies. When businesses encounter difficulties, “we don’t have to go to the government — they come to us proactively.”
Individuals who qualify as high-level talent in Hangzhou can not only obtain local residency but also receive subsidies ranging from tens of thousands to hundreds of thousands of RMB for housing, rent and daily expenses.
Zhejiang province has since managed to fend off the broader demographic decline by attracting waves of migrants (mainly young professionals)
As of 2024, Zhejiang had a population of 66.7 million (+ 430k y/y) with the rise entirely driven by migration. The province’s three largest cities – Hangzhou, Ningbo and Wenzhou – recorded population gains of 102,000, 80,000 and 91,000, respectively, accounting for more than 60% of Zhejiang’s total population growth.
These regional megatrends underpin the strong growth of Binjiang Services’ gross floor area (GFA) under management at >30% p.a. for the last 6 years. Clear visibility into the backlog/”contracted GFA” (ie. GFA that will be managed in the future) also means >=15-20% p.a. growth for the next 5 years is highly likely, if not conservative - bearing in mind that we are still in a generational downturn in China’s property sector.
(2) Secondly, Binjiang Services have a clear strategy targeting growth in the management of high-end properties, where service differentiation and quality matters more relative to mere costs (eg. low-end residential -highly commoditised). Innovation and execution revolve around maintaining the highest service standards and elevating their brand value and brand premium to secure positioning within high-end properties.
As the tide from real estate already went out in the last 3 years, relative performance between Binjiang Services and Greentown Services is most telling of their resilience, quality, and growth prospects. This is the most relevant peer comparison available as both have largely overlapping footprints (duopoly within Hangzhou, Greentown has >60% of their managed GFA within Zhejiang & Yangtze River Delta). For context, across expert transcripts, Greentown is often cited as ‘best amongst the rest’ of the property management peers in terms of service quality
By extension, this makes Binjiang Services (seldom mentioned given size and coverage) the best in class shown through divergent performance over last 6 years + downcycle as enabled by their strategy and culture.
From Binjiang Services’ management discussions and letters, they seem to be highly cognisant of quality growth. They seek to build a leading brand in high-end property management, which means having “premium projects, high-quality services and high-quality customers”.
In fact, the board’s strategic plan in 2020 underscored this where they “strive to become a leading property service provider and a model company in Hangzhou within 1 to 3 years”.
Continuous service innovation stems from the enterprise philosophy of “Proprietor First, Service First, Quality First” + “Make Life Warmer”. A common refrain from the chairman’s letter:
The Chinese family culture has lasted for thousands of years. Home has been playing an extremely important role in the hearts of Chinese people. Home should be a shelter carrying happiness and warmth. The Group has always adhered to our enterprise philosophy of “Make Life Warmer”, and strive to bring more happiness to our owners. The Group is committed to make home not only a place to live but also a source of happiness that meets all needs. The Group has always and will continue to optimize our property management services, and strive to become an industry-leading brand and participate in the establishment of high-end quality standards.
- FY22 Chairman’s Letter
Binjiang Services’ enterprise philosophy drives service innovation - this has led to the birth of various complementary sub-segments within 5S value-added services to property owners (eg. home decoration services given their footprint in high-end residential such as lake villas/penthouses) that are highly margin accretive at the group level. The 5S services in this regard, are less generic and more tailor made to their customer profiles.
An example of such customised value-add within individual properties can be seen from the newly delivered Zhegong New Village (adjacent to Zhejiang University) where the majority of residents are elderly.
Initiatives include:
“Each month, stewards will make regular home visits to understand the living needs and daily conditions of the elderly proprietors and then provide feedback to their family members for reassurance. Besides, the property management team will pay special attention to the elderly living alone and offer them as much assistance and company as possible in their daily life. The service center introduced measures such as medical accompaniment service to ensure reliable support for the elderly. Currently, the service center has purchased wheelchairs to provide convenience for proprietors in need.”
On how to enrich the life of the elderty, director said “Considering the large number of elderly residents in the residential quarters, we will place a greater emphasis on events around traditional festivals such as Laba Festival, Dragon Boat Festival and Mid-Autumn Festival, to guarantee a sense of participation and fulfillment for the elderly.”
On a regular basis, the property management staff will organize diverse activities such as cultural exchanges, Baduanjin exercises, scientific health preservation, and anti-fraud campaigns for elderly residents
A distinctive feature of Binjiang Property services, the convenient service encompasses a wide range of daily life activities such as knife grinding, umbrella repair, shoe repair, and haircuts, making it possible to solve all daily life demands within the residential quarter.
Operationally, Binjiang Services delegate much responsibility to project managers at the individual property level, which facilitates smoother service response day-to-day:
Binjiang Service authorises more discretion to its project managers. For example, on some expense-related affairs... they will make a quite comprehensive annual budget of expenses. During the process of making budgets, Binjiang Service sets an upper limit for project managers who have the discretion to use 60-70% of the budget. This enables quick response time for daily maintenance etc. + also have discretion to use the budget to entertain guests or gifts for business hospitality.
There is also a certain “radical transparency” to ensure service standards are maintained, via frequent cross-inspections on customer satisfaction and quarterly safety cross-inspections. Project manager incentives and evaluation are tied to the scores on customer satisfaction, daily operations and property management fee collection rate:
Binjiang Service’s functional departments conduct quality inspections on all projects every month and make public the quarterly scores. If there are 8 property projects in Shaoxing, every employee holding the position of deputy director, project manager or above in each project should go to another region for a safety evaluation and inspection every quarter.
For example, Wanjia regional branch may carry out satisfaction surveys on projects in the Haian region and there will be an impact on the year-end assessment of regional branches. Besides, Binjiang Service will entrust a third party such as China Index Academy or other institutions to make a satisfaction survey and give a score which will be directly counted in the final assessment score.
Evaluating project managers’ performance: For daily operations, another data source is the collection rate. In terms of the collection rate, projects in Hangzhou should reach over 99% while those outside Hangzhou should reach over 98%, which is a hard-and-fast index. As for customer satisfaction, it should be maintained above 95% and special influence factors need to be reported.
Shareholding Structure and Management
Management owns about 71%, with 29% remaining free-float as follows:
Qi Jinxing (45.9%): Founder and Chairman of Binjiang Real Estate, former non-executive director of Binjiang Services
MBA in Zhejiang University, began career in government district office in public administration and urban planning before founding Zhejiang Real Estate in 1996
Zhu Huiming (12.9%): Former non-executive director
Mo Jianhua (12.9%): Non-executive director since 2017, also director of Binjiang Real Estate
Current CEO of Binjiang Services is Zhu Lidong (previously 20 years across GM roles at Binjiang Real Estate). He took over Yu Zhong Xiang (retired) at the end of 2023.
Financials and Valuation
Given high visibility of contracted GFA, this should support minimally a baseline >=15% sales compounding over 5 years as “contracted GFA” transitions to “GFA under management”. Assuming margins remain relatively stable at the group level through the period going forward (margin compression today owing to cyclical elements such as services to non-property owners/developers given downturn + ramp up in home decoration service sub-segment within 5S which dragged down segment margins but this will likely stabilise), most of this would flow to the bottom line supporting at least HSD p.a. EPS growth.
I assumed gross margins to trend down to ~15% and EBIT margins to ~12% over the next 5 years as a (very) conservative base case.
For context, these would represent the margins of the lowest performing peers/troubled POEs during the property downcycle over the last 3 years.
At HKD25/share today, Binjiang Service Group trades at 11x P/E fwd, or 7.6x P/E (ex-cash) with a 6% dividend for a quasi-royalty on the best property developer in China and is a BUY.
Risks
Parent developer risk (low – 3 red lines compliance as mentioned in sector write-up + growing away from parent GFA which now constitutes 40% of total GFA), but this has to be tracked
Economic/Real Estate shock specific to Hangzhou city/Zhejiang Province (low – unlikely, most resilient relative to other regions, innovation hub with inter-city migration tailwinds)
Addendum (insights on the parent developer)
Binjiang Real Estate is unique in that they are the only property developer in China with a sole focus in Hangzhou.
Lack of oversight at Evergrande etc. was the cause of excessive risk-taking, and this was due to limited visibility of the HQ over all the different regional departments spread out across the country
Binjiang Real Estate renounces expansion/volume growth for the sake of it.
Over a decade ago, they had to write-down land purchases in Shanghai and Shenzhen as the market turned against them. The lesson that stuck with them is to strictly stick to development within their area of competence which is firmly Hangzhou City as the core
Hangzhou is where they have an in-depth understanding of the local markets and are certain of developed project returns, especially when there are only 2 trusted brands in the minds of consumers – Binjiang and Greentown in the locality (but Greentown’s focus is not only on Hangzhou, split between other big cities)
Most/all other property developers only care about market share gain, nationwide expansions etc. (typical volume growth at all costs, Chinese management mindset)
Quality Orientation: Founder & CEO Qi Jinxing regards quality and brand as the origin of the enterprise's value, emphasizing that it does not rush to open sales or expand scale at the expense of quality and brand, and focuses on creating high-quality products and services. CEO & Founder is extremely passionate about property, at 63 years old, he remains highly involved and still goes to inspect completed projects first-hand with the core management team before they are handed over to buyers
Binjiang real estate is a handful of very rare property developers in China who genuinely care for and have improved the quality of their projects over the years. They view property as a consumer good, and philosophy revolves around improving the consumer experience, their strict quality standards have elevated Hangzhou’s trust in their brand over the years
Planning ahead: His management approach is full of considerations for early planning. For instance, he regards the leasing work as a long-term strategy for Binjiang's future development and conducts early investigations, studies, and plans for the elderly care business
Given a time machine, Binjiang’s management would not even have expanded into adjacent areas within Zhejiang province. True to this, landbank acquisitions since 2022 have only been within Hangzhou (positive)
Some more things to like on company culture
Given sole focus in Hangzhou, Binjiang Real Estate has a flat hierarchy
Lean team, efficient, highest revenue/employee of all developers
Treats their employees well, generous leave/compensation package and notable bonding activities/events
Very conservatively run, anecdotally employees and mid/lower-management wanted Binjiang to focus on growth and expanding footprint in 2016 (all their peers were doing so) when they began to have a healthy cash balance, but CEO & senior management chose to remain focused within their geographical area of competence
Leverage Ratio of Property Developers (vs 2 best Chinese SOE developers China & direct peer Greentown Holdings) Land acquisition cadence of Binjiang Real Estate have been stable p.a. over 2022-2024 which means we likely see stable GFA growth for Binjiang Service over next 3 years
Land reserves today are 70% Hangzhou, 10% Zhejiang, 20% others by acreage
What is different this cycle? Policymakers finally understand that China has no shortage of residential properties, but quality properties remain undersupplied
Given how far property prices have fallen, policymakers now encourage developers to sell projects at higher prices (which also benefits government revenues as they would be able to sell land at higher prices) -> ie. developers capable of quality projects with market demand stand to benefit
I think we continue to see property prices of the tier-1 cities & the rest continue to widen (less of a broad-based property recovery over the medium term)
This means investing in the right localities matter more than ever vs past cycles, and Binjiang Services is a unique, and the only pure-play on arguably the best growth city/region in China
Since 4Q24, following cities have been most resilient in property price recovery: Shenzhen, Xiamen, Chengdu and Hangzhou
