Phoenix Tree Holdings (DNK), better known as Danke Apartment for the home rental platform it operates, has been in the news for the wrong reasons in the past month. Yet, the stock tripled in mid-November as though a miracle had happened.
A case could be made that the rebound was justified because the stock had fallen too hard the downtrend in July when it was trading above $10. Phoenix Tree has been trading below $10 for the ensuing four months plus. The current price implies a price-to-sales [P/S] ratio of 0.60 and a forward P/S of a mere 0.51 times.
This valuation looks incredibly cheap for a company that operates a co-living housing platform targeting those who desire a "new rental" model of accommodation in apartments that are designed, renovated, and furnished "in a standardized and stylish manner," according to its F-1 registration statement. The document throws in numerous other current-day buzzwords like data science, artificial intelligence decision engine, data analytics, and disruptive business model that would make any investors clamoring for the next on-demand platform excited.
"We run Danke like a data science company. As our founders are technology veterans, technology is deeply rooted in our DNA. At the core of our technology system is our proprietary artificial intelligence decision engine, or 'Danke Brain,' which makes real-time and unbiased decisions based on data analytics to guide each step of our business operations and generate valuable business intelligence. Danke Brain has self-learning capability. ...
Danke Brain is supported by our big data platform, which continually processes and structurizes a massive amount of data with over 100 dimensions. Connecting everything together, our IT infrastructure digitizes our business operation and links all of our employees, property owners, residents and third-party service providers.
Leveraging our robust technology capabilities, we are able to handle complicated and large-scale business operations. For instance, pricing decisions represent a core competency for a co-living platform, yet pricing is complex due to the heterogeneous nature of apartments, neighborhoods and cities."
Source: Phoenix Tree Holdings
The company also has strong backers, including Alibaba's (BABA) Ant Group. Mr. Gang Ji, a director of Phoenix Tree since 2019, has served as a vice president of Ant Financial since 2016 and was a vice president of Alibaba Group from 2008 to 2016.
Unfortunately, Phoenix Tree has seen its revenue growth faltering. To make matter worse, its operating losses worsened even as its revenue dropped.
Phoenix Tree's domestic rival, Q&K International Group (QK), isn't doing better either. The latter's share price has similarly embarked on a downtrend since June. The two Chinese rental apartment platform operators got into dire straits amid the pandemic and were unable to bounce back despite the broader economic recovery in China.
Data by YCharts
Phoenix Tree was reported to be under investigation by the authorities in June following allegations of financial exploitation. Qingke, backed by Morgan Stanley (MS), was also facing the heat from tenants and landlords. A cash crunch amid the pandemic-induced slowdown squeezed both Danke and Qingke. Consequently, they missed payments to property owners on their leases even as they were accused of raising rents at the same time.
However, it can also be argued that its woes predated the COVID-19 outbreak. The occupancy rate as reported by Phoenix Tree has been on a decline since peaking in the quarter ending June 30, 2019, long before the world heard of the coronavirus incidents in Wuhan. The occupancy rate was 75.6 percent in the quarter ending March 31, 2020, a 14.6 percentage point reduction from three quarters ago.
As of | ||||||||||
March 31, | June 30, | September 30, | December 31, | March 31, | ||||||
2019 | 2019 | 2019 | 2019 | 2020 | ||||||
Occupancy rate (1) | 77.8% | 89.0% | 86.9% | 76.7% | 75.6% | |||||
(1) Represents the aggregate number of rented-out apartment units as a percentage of the number of opened apartment units as of a given date. | ||||||||||
The business appears to be rapidly burning cash. Although the cash from operations is being used up at a lesser rate in the recent quarters, the aggressive acquisition of real estate assets meant that the cash from investing is also deeply negative.
| In Millions of USD except per share items | |||||||
| Cash Flow Statement | 12 Months Dec 2017 | 12 Months Dec 2018 | 12 Months Mar 2019 | 12 Months Jun 2019 | 12 Months Sep 2019 | 12 Months Dec 2019 | 12 Months Mar 2020 |
| Net Income | (41.7) | (198.5) | (293.6) | (375.8) | (429.3) | (493.3) | (543.4) |
| Cash from Operations | (17.6) | (169.3) | (284.7) | (326.1) | (293.3) | (274.5) | (197.6) |
| Acquisition of Real Estate Assets | (52.4) | (187.8) | (165.8) | (317.0) | (312.8) | (281.8) | (277.0) |
| Net Sale / Acq. of Real Estate Assets | (52.4) | (187.8) | (165.8) | (317.0) | (312.8) | (281.8) | (277.0) |
| Cash Acquisitions | - | (6.5) | (6.7) | (31.5) | (35.7) | (27.2) | (26.8) |
| Net Cash from Investments | (22.8) | 2.1 | (9.1) | (40.0) | 0 | 19.7 | 19.4 |
| Net (Increase)/Decrease in Loans Orig/Sold | - | - | - | - | - | (3.4) | (3.3) |
| Other Investing Activities | - | - | (95.6) | - | - | - | 65.4 |
| Cash from Investing | (75.2) | (192.5) | (277.4) | (388.5) | (348.5) | (292.7) | (222.3) |
The company managed to raise $164 million in an IPO early this year. With a series of bad press, it's unlikely Phoenix Tree is able to find secure more funding from secondary offerings. It won't be easy to borrow more from banks either. It already has a net debt of $641 million as of the last financial statement, higher than the current market cap of $610 million.
Various state media, including People's Daily and Xinhua, implored Danke to clear the mess it created. They also called for tougher regulatory oversight in the industry that was previously welcomed for the lower rental options availed amid China's lofty property prices and an influx of rural migrants into the larger cities.
Its management is also in disarray. According to a June 18 announcement, the founder and former CEO was "involved in an investigation by local government authorities into certain matters relating to his business venture prior to the founding of Danke." Consequently, Phoenix Tree's board had to appoint Yan Cui as the interim CEO.
Investor interest was piqued by a Reuters scoop on Tuesday revealing that an investment arm of Beijing's city government held talks with the shareholders of Phoenix Tree Holdings on raising new funds, citing three sources. The motivation for government intervention was attributed to the growing pressure "to ease mounting credit stress and social instability caused by rental firms with cashflow problems."
Long-suffering shareholders were possibly anticipating a repeat in the likes of electric vehicle maker, Nio (NIO), which received fund injections from the Hefei city government and subsequently saw its stock jump multiple times from the trough. Two days later, however, the high hopes were dashed.
Reuters updated that the purported white knight Beijing E-town International Investment and Development Co, a private equity firm controlled by the Beijing municipal government, denied it would fund Phoenix Tree Holdings. In a statement, it made sure there would be no lingering speculations, stating the PE outfit "never had contact with Danke Apartment project or had any investment intention."
Its woes appeared to be worsening. Employees were reportedly planning to take legal actions against the company over unpaid wages. Yet, with the stock jumping as much as 20 percent during Tuesday's pre-market trading, it shows the potential for short-term gains in an investment of Phoenix Tree.
However, any potential savior is expected to extract the largest benefits for the risks the fund injection entails, leaving existing shareholders at a disadvantage. On the other hand, if the besieged company fails to attract new investors and is unable to seek further financing from the banks, it is difficult to see the stock holding at the current price level.
The fundamentals are eroding even as the reputation of Phoenix Tree goes down the drain. Landlords and tenants would have a longer memory of its bad character than investors. Phoenix Tree looks unlikely to rise from the ashes.
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