Report
Phillip Zhong
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.
Underlying
SOHO China Ltd.

Soho China is engaged in property development and property investments. Co. operates within three segments: completed projects held for sale; completed investment properties; and projects under development.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Phillip Zhong

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