One for the future

As the world’s most expensive property market, Hong Kong is poorly nourished soil for start-ups. But ironically enough, when the government made a play of seeding a new tech sector in the city in the late 1990s, it was the territory’s leading property firms that spearheaded the effort.

One large plot of waterfront land was granted to Richard Li, younger son of Hong Kong’s richest man Li Ka-shing, in a bid to seed a localised version of Silicon Valley. Investors embraced the idea initially, stoking a market frenzy that helped Li junior take control of Hong Kong Telecom (formerly controlled by Britain’s Cable & Wireless). But the new zone – called Cyberport – had none of the creative dazzle of its Californian counterpart. Failing to nurture a single unicorn from the tech world, the district has ended up as home to yet another residential complex, plus a large shopping mall and office space.

Property blue-chip New World Development also promised to ignite the local tech scene with New World Cyberbase, another internet-focused business unit. But a decade later it would take a different path, converting the internet unit into a coal miner called Mongolian Energy at a time when the commodity sector was in vogue with investors.

Henderson Cyber was a similar idea, spun off from another of the major property developers. There was talk that it was well positioned to profit by providing internet-powered services to the buildings under its ownership. But again the model failed and Henderson Cyber was taken private in a buyout at less than half its offer price.

Might things be different for Shenzhen-based Vanke, which is embracing the ‘property-plus-tech’ model too? After packaging its property management unit as a tech counter, Vanke has been selling a growth story to investors with the IPO of Onewo in Hong Kong this week.

Step forward Onewo

Vanke has been offering property management services since as early as 1990. But as the management division grew to much greater scale it was rebranded as Onewo Space-Tech two years ago and prepared for a potentially lucrative spinoff.

The renaming was a creative flourish compared to peers like Country Garden’s CG Services or China Evergrande’s Evergrande Property Services. Onewo’s branding in English inserts ‘new’ between two ‘o’s’, signalling novel forms of doing business, with an offline-to-online focus. Its Chinese name Wanwu Yun (万物云) has tech overtones as well, translating literally as “everything cloud”.

The branding strategy underlines the company’s ambitions, Sina Finance suggests, as Onewo doesn’t want to be classed in the same bracket as other providers like CG Services. “Vanke wants to elevate its property management unit to a higher dimension. By positioning itself in the ‘cloud’, Onewo can look down on peers and communicate to everyone that it is just not the same,” it says.

How big was the IPO?

Helped by Vanke’s position as the country’s largest homebuilder over the past 30 years, its property management unit is also a leader in a highly fragmented market. By the end of March, Onewo was active in 120 cities, managing homes in 2,889 residential properties with gross floor area of more than 670 million square metres.

Total sales for 2021 grew 31% on the year to Rmb23 billion ($3.2 billion). According to market research outfit Frost & Sullivan, Onewo ranked first in property management services nationally in terms of revenue. And there is still plenty of room to grow from a market share of just over 4%.

Nonetheless, the response to Onewo’s initial public offering has been lukewarm amid awful market conditions that have seen the blue-chip Hang Seng Index shed more than 13% of its value in less than a month.

Seven cornerstone investors (who take significant portions of an IPO and hold the shares through a lengthy lockup period) including China’s state-run Mixed Ownership Reform Fund and Chengtong Investment have absorbed about 35% of the share sale. But the retail tranche of the offering was only 0.82 times subscribed, Hong Kong Economic Times reported.

On Wednesday Onewo set its offer price slightly lower than the mid-point of the indicated range, valuing China’s leading property management firm at about HK$58.5 billion ($7.5 billion). Excluding the secondary listings of duty free monopoly China Tourism Group and lithium producer Tianqi, that made Onewo’s share sale one of the largest in Hong Kong this year, raising about HK$740 million. The debut price also created the second-largest listed firm in the property management sector by market value, behind CR Mixc Lifestyle Services’ HK$70 billion market capitalisation but ahead of CG Services, which was worth HK$42 billion as of earlier this week.

Onewo’s first day of trading was chastening, however, with the shares dropping nearly 7% on Thursday. Much of that was due to the tumultuous conditions in global markets, commentators said. Broader concerns about the prospects for China’s property sector have also persuaded investors to stay on the sidelines, they added, contributing to a disappointing debut in Hong Kong.

Vanke took too long to list its property management unit?

Before this week Vanke was one of a small group of Chinese real estate majors yet to spin off their property management units to new shareholders. The other two exceptions, Longfor and Wanda, are both planning similar IPOs in Hong Kong, it has been reported, while at least 32 property management firms have gone public over the last two years as the sector came into vogue with investors (see WiC539).

The share price of CG Services has more than doubled since its IPO in 2018, for instance, surging to record levels in May last year when the company was worth HK$250 billion, compared to its parent Country Garden’s market value of HK$200 billion.

No wonder that Vanke’s management was bombarded with questions during its most recent earnings call about its plans for Onewo.

The strategy was clear, Sina Finance reckons: Vanke was trying to grow the unit and hold out for an even better valuation than its competitors, but the slow-burn approach now seems to have backfired a little.

Vanke formally announced the listing plan for Onewo in November last year. But there were already signs that investor enthusiasm for the property management sector was fading, dragged down by continuing efforts from regulators to deleverage the wider property market.

Since then market sentiment has been hit by global growth concerns stoked by the crisis in Ukraine and, more recently, the dramatic interest rate hikes from the Federal Reserve, which have accelerated capital flight to the domineering greenback.

Just as Onewo was gearing up for its trading debut, Hong Kong’s Hang Seng Index dipped below the 18,000 threshold, its lowest level since 2011.

Vanke itself was worth nearly Rmb200 billion as of this week, despite a 15% decline in its share price in Shenzhen, where it is listed. But if Onewo had opted to go public two years ago, it would have secured a much higher valuation. At their peak, CG Services was priced at 80 times its 2020 earnings, while CR Mixc Lifestyle traded at a lofty 120 price-to-earnings multiple. Now the price-to-earnings ratios of both companies have plunged to 10 and 35 respectively.

As of the middle of this month the Hang Seng property services and management index was down more than half this year as a result of ongoing weakness in China’s property sector.

At its IPO price Onewo was still worth about 30 times its earnings last year, which at least means that investors are willing to benchmark the company with CR Mixc, which is backed by the state heavyweight China Resources and focuses on the commercial property sector.

Yu Liang, Vanke’s chairman, also insists that Onewo timed its IPO astutely. During an earnings call in August, Yu explained that sector valuations were now more “rational” than in 2020. “We are not selling piglets at the best possible price. By going public, we are actually looking for bigger room for development [for Onewo]. We are not concerned with market valuation in the short term,” he argued.

So what does Onewo actually do?

More than half of Onewo’s residential management projects, and their associated revenues, come from Vanke, which will continue to own 56% of the company post-IPO. During its roadshow, Onewo played that dependence down, making an effort to position itself as an independent outfit that competes aggressively for new business, rather than surviving as the “after-sales department” of its parent company.

Onewo is also looking to diversify into office and shopping mall segment in a bid to reduce its reliance on residential property services. In 2018 it bought a 4.9% stake in Cushman & Wakefield, a leading real estate consultancy in the commercial sector. An alliance with its global partner should help it establish more of a presence in an even more fragmented marketplace in China, where Onewo is already the leader with just 0.2% share in terms of revenue.

Onewo talks as well about expanding quickly into a business area that it describes as ‘serving a city’ – or helping local governments to manage their public resources and urban spaces. Alongside the focus on providing services to residential or commercial complexes, Onewo is pitching for a bigger stage in managing China’s smart cities (something that dovetails nicely with one of the central government’s policy priorities).

A case in point: Onewo is already one of the service providers in a ‘new area’ co-developed by the Guangdong, Macau and Hengqin authorities, offering services ranging from classification of waste disposal to collection of business data for the local government. In 2019, Vanke also joined forces with Microsoft to launch a ‘Future City Lab’ in a bid to develop urban management solutions and it says it has identified almost 3,500 ‘target sub-districts’ in 100 cities where it plans to offer its services.

Indeed, during another earnings call three years ago when analysts were questioning when Vanke would spin off its property management unit, Yu Liang’s reply, according to China Entrepreneur magazine, was that the company was waiting until Onewo was better known as a ‘service provider to cities’ and thus better able to differentiate itself from other property management firms.

How tech-focused is Onewo?

Vanke was one of the first developers to introduce property management services for homebuyers. As a pioneer it also grasps that the business model is no longer the high-growth story that it once was, however, and no longer capable of sustaining share prices on triple-digit PE ratios.

Competition for business brings a natural ceiling for profits in the sector, making it harder to raise fees, while property owners in China are notoriously difficult to deal with as customers, warns China Entrepreneur.

Indeed, Onewo charges pretty much the same service fees today as it did a few years ago. In the residential sector, the company’s average management fees were Rmb3.13 per square metre a month in the latest reading, compared with Rmb3.06 in 2019. Some of that minimal increase is due to efforts to win new business, bringing more buildings into Onewo’s portfolio. But property management firms are also under increasing pressure to contain costs. The industry has traditionally been labour-intensive, for instance, and Frost & Sullivan reckons that average salaries for staff were rising at 7.2% a year between 2016 and 2021.

This helps to explain why Vanke has been keen to infuse its property management unit with a little tech-sector glamour, as well as promising to bring new ways of working as a service provider to clients.

Last year Onewo poached Ding Xianfeng, a leading figure at AliCloud, as its chief technology officer. Ding’s 20 years of experience will help Onewo to grow sales from newly-developed services, the company says. Much of that focus will concentrate on so-called remote space-tech solutions, which incorporate artificial intelligence and business process outsourcing. Revenues from these services were just over 7.3% of sales in the first quarter, up a little from 5.8% in 2019.

Onewo is promising to invest about a quarter of its IPO proceeds in new applications of artificial intelligence and business-process-as-a-service software. The goal is to sell these services to thousands of new clients from the cloud. Time will tell whether the investment pays off, but at least Onewo is planning to spend on innovation. That marks the company out as different to the property heavyweights of Hong Kong, which have spent virtually nothing on R&D for decades.

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