First Service Holding Limited HKEX: 2107
The failed takeover by Sunac Services gives a great opportunity in the chinese management service sector
The Introduction to the Opportunity
Figure 1. First Service Holding IPO
In this report, you will find a research report about First Service Holding (HKEX: 2107), Chinese property services company. We believe it is a special situation due to the events we are about to present in the following report. The company operates in the same business as Kaisa Prosperity (HKEX: 2168), a company that we already published a report and a thesis update. You can read our analysis of the business at https://www.newvilaresearch.com/research.
To find opportunities and be on track with the sector, I tried to follow most of the companies in the Chinese Property Services business, there are more than 50.
There are so many peers, but the time spent is worthy. Thanks to this, we have found a very interesting opportunity with a short-term catalyst.
In our previous update, I wrote about the market inefficiency and short-term trade opportunity in Sundy Service (HKEX: 9608), more info on Page 12 of the Kaisa H1 2021 Update Thesis. The company was trading way lower than peers, 15-20% discount to its net cash position. We thought that the market was not considering the raise of capital from the IPO. We were right. We sold too early based on the performance, but we were happy with the trade.
Now the opportunity in this business pops up, again. In this case, the inefficiency comes from a different reason, a failed takeover from Sunac Services Holdings (HKEX: 1516) to acquire First Service Holding.
Let’s start going back to 2021. First Service, like most of the microcaps in the property management business, was very undervalued compared to small, mid, and large caps. The company traded almost at net cash in some periods. During the first half of 2021 acquired 2 companies.
In July, the Evergrande crisis exploded and spread the fear to other property developers. Then, many developers wanted to sell their property services subsidiary, like Evergrande Group or Fantasia Holdings, to provide the parent company with liquidity.
Figure 2. First Service stock price during 2021-2022
In August, First Service announced that they were willing to start repurchasing shares, but they never did it. By the end of September, the Chinese news started to rumor about a possible sale of First Service by the management to help the parent company Modern Land China.
On the 8th of October, the company announced a trading halt due to insiders’ information and just a month later they announced the offer from Sunac Services to acquire 32% of the company and the rest of the shares for 2.62 HKD. A very high price for a company that was trading at 0.80 HKD before the rumors of takeover started. This gives some hints about how undervalued were and currently are some micro caps and small caps in this business. Sunac offer price valued the share at 11.85 times Price-To-Earnings of the last twelve months (LTM).
Table 1. Sequential Events of First Service during 2021-2022
During the Due Diligence by Sunac Services, the shares of First Services started trading again. As you may see in Figure 2 the stock price never reached the offer agreement and there was much higher volume than in previous months. Many traders and investors were willing to trade the possible takeover arbitrage.
Unfortunately for them, the takeover failed and many people that bought with the possible takeover rumors are, most probably, now selling (See the volume of the graph above). We believe there was a high volume of shares that wanted to exit and very few were willing to buy, dropping the price more than comparable peers and based on the fundamental value of the company. Opportunity.
In the following chapters, we will go through each player and bring some light to the current situation of the company and why we think there is a long-term opportunity with some catalysts in the short term.
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