China facilities management: Cleaning up

Chinese electric car manufacturer Nio wants to do everything quickly. The three-year-old company launched its first mass-produced vehicle last December and received 17,000 orders within six months. As China leads the world in battery electric vehicle sales over the next five years, Nio hopes to be accelerating down the straight while its premium segment peers are still in first gear.

Its ambitious sales targets cannot be met without a retail network and the company plans to make substantial additions to its current tally of seven “Nio Houses.” Each of these showrooms requires cleaning, security, air quality and pest control services and China Shine is the sole contractor. The facilities management operator is keen to continue piggybacking on Nio’s growth.

“We do 100% of the services in their fixed dealerships in China today. If we can keep that wallet share and the number of dealerships reaches 200, that would be a very strong client to go with in terms of developing integrated management services,” says Martin Mok, a partner at EQT, which recently bought a 40% stake in China Shine.

Even if Nio fails to expand at the projected pace, there should be no shortage of clients to fill the excess capacity as China’s wider outsourced facilities management space follows expansion patterns previously seen in developed markets. Private equity investors have seen the trend, prompting a smattering of deals where previously there were none. Diversification, integration and consolidation are the watchwords, but implementation is not straightforward.

Growth agenda 

The industry has grown 16% per annum over the past five years as revenue reached RMB410 billion ($59.8 billion) in 2017. It is set to hit RMB730 billion by 2022. Shine is targeting a tenfold increase in revenue to RMB2 billion by 2025. However, such is the level of fragmentation, should it achieve RMB1 billion by 2022, the company’s market share would rise from 0.05% to 0.14%.

“Compared to the US, Europe and Japan, China is about 20-30 years behind in terms of penetration, quality of service, and price points. Even within China, tier-two and tier-three cities are 5-10 years behind tier-one cities, and then in Shanghai, the overall penetration is almost 70%, but for some industries it’s not at 20%,” says Jing Shi, a principal with Advantage Partners.

Advantage, a Japanese GP that pursues deals in other markets where there is a Japan-related value creation angle, bought Chinese facilities management business ESG Holdings in 2012 and exited last year to Primavera Capital Group. Other activity in the space includes CITIC Capital Partners’ purchase of a majority stake in Jiangsu Sky Facility Management (SkyFM) in April.

Every investment thesis has a cost component. Chinese companies – whether they run shopping malls, office buildings, airports, or hospitals – are grappling with wage inflation and more burdensome social security requirements. Facilities management is a labor-intensive business, so it makes sense to outsource. At the same time, there is a growing recognition that a third-party specialist might be better positioned to provide the level of service end-users now demand.

CITIC Capital cited the “the stable trend of service outsourcing and growing need for high-quality property management” when explaining the rationale for buying SkyFM. It also outlined plans to expand the company’s footprint in terms of service scope and geographic coverage through a combination of organic growth and M&A. It is a familiar script.

Advantage helped ESG complete three bolt-on acquisitions during its five-year holding period. EQT has already guided Shine into agreements to absorb Shanghai East Asia Hong’An Cleaning Service and establish a joint venture with the real estate investment arm of China Everbright.

Diversification drive

With a client list that features Lujiazui Group, CITIC Group and Kerry Properties, Hong’An specializes in servicing high-end office buildings. This is expected to bring more balance to a Shine portfolio comprising more than 100 projects across 70 cities, of which the retail contribution to revenue is 36%. Offices account for 16%, while large commercial complexes with office and retail space make up a further 31%. Developing client bases in industrials, transportation and healthcare is a priority.

When Advantage invested in ESG, the company primarily served shopping malls and office buildings. By the time of exit, customers included five airports, railway stations, hospitals, and even Shanghai Disney Resort. The GP also succeeded in taking a cleaning-focused offering and adding higher-margin hard services that are reliant on technology and equipment as opposed to just labor.

“If you are providing cleaning services to five hospitals, it is easy to sell cleaning services to a sixth. What’s more challenging is selling non-cleaning services because you are competing with someone in a different space. You must demonstrate your capabilities and convince the customer that you have become a different player,” says Advantage’s Shi.

With one of its airport contracts, ESG grew a cleaning remit by establishing new teams and taking on a variety of maintenance responsibilities for equipment such as air conditioning units and luggage screening systems. Many industry participants prefer the short-cut route of a bolt-on acquisition where they get the new functional capability or geographic coverage ready-made.

Nearly 80% of Shine’s revenue comes from cleaning, so that is expected to be the calling card as the company seeks to broaden the scope of its business. “Many people have more than one service, but few have integrated them well,” Mok notes. Nevertheless, he believes this strategy, when properly executed, makes sense for seller and buyer: the former can leverage economies of scale while the latter can have one relationship instead of a dozen – and with a provider that has a lot to lose.

In most cases, the buyer is an end user rather than a property manager and that is the preferred structure. The rationale is that, when dealing with the management arm of a Chinese developer or one of the global real estate services players, it is harder to showcase value-add credentials and generate more cross-over business. The presence of a middleman might also compress margins.

But in an outsourced facilities management industry that is still finding its feet, the lines are often blurred. While the likes of JLL or CBRE Group might ordinarily win a mandate from a corporate and then subcontract certain services to local players, some Chinese clients insist on end-to-end solutions. Even the distinction between property management and facilities management – looking after a building versus looking after the people who occupy it – can be unclear.

“The opportunities are plenty, but the structure is rather immature. There is not a defined approach for any service provider at this point in time – it is all about gaining market share,” says Annie Wong, managing director for North Asia integrated facilities management at JLL. “But if you are in a market where there are no rules, if you can tough it out, then you can help shape that market.”

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• Topics
• Greater China
• Support services
• GPs
• China
• EQT Partners
• Advantage Partners
• CITIC Capital
• Growth capital
• M&A