China's Dalu International Files For US IPO, Seeking Rich Valuations

The regional property manager has filed for a Nasdaq IPO that would value it at about $100 million and give it a far higher P/E ratio than most of its peers

Key Takeaways:

• Dalu International has filed for a Nasdaq IPO that could raise around $8 million and give the company a price-to-earnings ratio of about 57
• The property management company boasts far higher margins than most of its peers as it transitions into more profitable rental services

China's property market has hardly been a friendly place for investors these days, as prices continue to slump and thousands of projects remain unfinished due to lack of funds and weak demand. But that's hardly deterring Dalu International Group Ltd., a regional provider of property management services, which is aiming to raise a relatively modest $8 million in a Nasdaq IPO, according to a filing by the company this week.

Property management companies are one of the few groups that have remained consistently profitable during China's real estate downturn, relying mostly on regular management fees for their revenue. Still, even this group is coming under pressure, as reflected by data in Dalu's prospectus that we'll describe shortly.

This IPO is somewhat unusual for a number of reasons, led by Dalu's choice to list on the Nasdaq. Nearly all of its peers are listed in Hong Kong, where investors are quite familiar with anything related to China's property market. Perhaps Dalu is choosing New York for exactly that reason, as it's also seeking quite a rich valuation compared with many of its Hong Kong-listed peers.

Dalu seems to feel it merits such a rich valuation due to its impressive margins, which appears to be the result of its recent move beyond traditional property management services into more lucrative leasing services. Such services have become its main revenue source since it entered the business just three years ago.

The company also offers a relatively unique chance for investors to buy into a very regional property manager that hopes to expand beyond its home base in Chengdu, capital of Southwest China's Sichuan province. It says it plans to use half of the proceeds from its IPO for strategic investments, including acquisitions and joint ventures that could take it beyond its current base where it manages about a dozen commercial and residential properties, and provides subleasing services for another three.

Before we delve into its financials, we'll take a closer look at the company's fundraising goals that show why it thinks quite highly of itself. Dalu said it plans to sell 1.5 million shares for between $4 and $6 apiece, representing 7.7% of its expanded share capital. That would value the company at about $100 million.

That market value and the company's latest annual profit would give it quite a high price-to-earnings (P/E) ratio of 57. Other Hong Kong-listed peers, which are all much larger, trade at far lower multiples, including Jinmao Services (0816.HK) at just 6.7, Onewo (2602.HK) at 15, and the smaller Yuexiu Services (6626.HK) at 9.2.

Part of the low valuations for its peers may owe to the fact that most are units of major listed property developers that are nearly all losing big money right now. Investors may worry that those bigger parents may try to syphon funds from their property management arms that are one of their few profitable assets. In fact, Dalu International is also controlled by a real estate developer, Dalu Group, which currently supplies about a quarter of Dalu International's revenue.

The only peer that comes even close to what Dalu is seeking in terms of valuation is KE Holdings (BEKE.US; 2423.HK), China's leading provider of real estate brokerage services, whose current P/E ratio stands at 47.

Fat margins

All that said, we'll take a closer look at Dalu International's financials, including gross margins that look quite strong. At the same time, those financials show how even property managers are now coming under pressure as commercial property vacancies grow and homeowners are less willing to pay high management fees in a slowing economy and weak property market.

The company operates in a Chinese property management services market expected to grow 4.5% annually from 2020 to reach $108 billion by 2027, according to third-party market data in the prospectus. Dalu also points out that the market's regional nature makes it highly fragmented, providing opportunities for consolidation.

Dalu's revenue grew by an anemic 3% to $2.84 million in the six months to last September, the first half of the company's fiscal year, from $2.76 million in the year-ago period. That represented a sharp slowdown from the 15.7% year-on-year revenue growth it recorded in its fiscal year through March 2024, when the figure reached $5.54 million.

A major factor behind the slowdown was weakness in the fees the company charges for its services. Those fees for its managed residential properties fell slightly to $0.34 per square meter in the six months to September 2024 from $0.35 a year earlier. Commercial property management fees showed a similar trend over that period, dropping to $1.71 per square meter from $1.75 a year earlier. Before that, residential management fees jumped 46% in the previous full fiscal year, while commercial management fees rose by 14%.

"At present, office space and retail space supply are rising when occupancy rates are on the decline," the company said. "How to attract and retain tenants and customers has become a major challenge in our business operations."

Despite the weakness, Dalu managed to record a gross margin of 44.2% in the six months to last September – nearly double or more compared with the 24.6% for Jinmao Services in the first half of last year, 25.9 for Yuexiu Services and 21.2% for Country Garden Services.

A major factor behind its high margins appears to be Dalu's April 2022 entry into leasing services, which carry higher margins than management services. The prospectus shows that such leasing services now account for more than half of the company's total revenue, at around 60% in its latest reporting period, while most of the rest comes from property management.

On its bottom line, Dalu reported a net profit of $878,000 for the six months through last September, up 4.8% year-on-year. That kind of profit growth, combined with its 3% revenue growth, hardly look that impressive, and trail most of its peers. But Dalu is probably hoping investors will focus on its margins, plus its potential to become an industry consolidator, as it floats shares in New York – rather than Hong Kong – to take advantage of relative investor unfamiliarity with the complexities of China's property market.