Morningstar | Faster Growth Ahead, New Strategy and Restructuring Heightens Uncertainty
We initiate coverage of Joy City Property with no-moat and stable moat trend ratings, and a fair value estimate of HKD 1.20 per share. Joy City Property is a real estate developer in China. It stands out as one of the few domestic companies that have succeeded in developing and managing quality retail assets, a segment long dominated by Hong Kong players.Our fair value estimate implies a price/book ratio of 0.5 times, a forward PE of 11 times, and enterprise value to EBITDA of 9 times. Our valuation is based on a cost of equity of 12% and a weighted average cost of capital of 8.9%. The company’s valuation is largely driven by the performance of its mature retail portfolio and ramping up several new greenfield projects.
The company’s flagship brand, Joy City Mall, is generally regarded as the destination for 18- to 35-year-old consumers, providing extensive lifestyle brands, coupled with entertainment and dining options. The company is less reliant on the international luxury brands which had traditionally been key tenants for Hong Kong operators in China. The company’s positioning and brand make it an attractive partner for many smaller retailers, both internationally and domestically, looking to expand in China.
After disposing of the stake in its core portfolio to several institutional investors and strengthening its balance sheet, the company announced an ambitious expansion plan to grow to 100 assets by 2030. The plan calls for several asset-light initiatives to manage capital expenditures and the balance sheet. The company will set up joint ventures with institutional investors for large greenfield projects. It will acquire majority stakes in existing assets, and then renovate and rebrand such assets under the Joy City brand. It will also acquire a minority stake and provide a management service contract for existing assets.
The quick expansion under asset-light initiatives presents a higher degree of earnings uncertainty. Further, a recent corporate restructuring placed the company under the control of a highly indebted midsize residential developer, which may present competing funding demand that may affect the company’s expansion plan.
Joy City Property is an investment holding company. Co. is engaged in the provision of corporate management services. Through its subsidiaries and associated company, Co. is also engaged in the hotel business; personnel management; painting owner; and decoration contractor and trading. Co. organized its business into four operating divisions: decoration contractor; trading of furniture; management services; and investment holding. Co.'s operations are located in Hong Kong, the People's Republic of China and other locations.
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