EUR 850.00 For Business Accounts Only

Morningstar | Soho China Expands 3Q, but Profitability Unclear

Soho China recently indicated that it is aggressively expanding 3Q, its coworking space offering. The company stated that it has 30,000 seats as of early 2018 and is targeting 50,000 by the end of the year. The company is looking to spin off 3Q through a separate listing sometime in 2019. However, the profitability of the company’s coworking business is unclear at this point. In addition, the company is still seeking to dispose of Tianshan Plaza, which may unlock some value through a special dividend. Given the opacity of the 3Q business, along with the potential gain from the asset disposal, we maintain our fair value estimate of HKD 4.10 and our no-moat rating.

The coworking space has attracted lots of investor interest recently. China-based operators UCommune, KR Space, and Naked Hub (recently acquired by U.S. operator WeWork) are expanding aggressively in China and overseas.

Management stated that it expects 3Q's average occupancy rate to further improve from 87% seen at year-end 2017 as the company seeks to service primarily large corporate clients. The uptake is higher than our expectation of a 70%-75% occupancy rate. However, we are cautious about the sustainability of this occupancy level. For comparison, occupancy rates at mature Regus centers tend to reach a high of 85%-86% during the peak of an economic cycle. While two additional assets currently under construction will make sizable revenue contributions in 2020, 3Q is the near-term driver for the company’s valuation.