Period  2Q14/1H14

Actual vs. Expectations Hua Yang Berhad (HYB) reported 1H14 net profit of RM24.6m which is lower than expectations as it only makes up c.27% of street and our full year forecasts. The weak performance is due to billings being heavily loaded towards 2H14 and higher construction costs, which resulted in lower-than-expected margin. On a brighter note, HYB raked in RM197.7m of sales which is 11.5% YoY higher, mainly from its on-going projects.

Dividends  None, as expected.

Key Results Highlights QoQ, despite a 25.8% improvement in 2Q14 revenue, its pretax profit was flattish at RM16.7m. The quarter saw pretax margin compression by 4.2ppt to 16.5% mainly due to higher construction costs.

 YoY, 2Q14 revenue and earnings were lower by 2.4% and 27.7%, respectively, on account of the same reasons stated above, and also due to the disproportionately higher billings from mass housing township in Johor such as Taman Pulai Indah and Hijauan, which yield lower margins compared to highrise projects like OneSouth.

 For 1H14, revenue and earnings declined 9.9% and 26.5% YoY, respectively mainly due to delay in recognition of the completion of OneSouth Phase 1 and also on the reasons as stated above.

Outlook  We gather that the company will still be able to meet our sales target of RM621m for FY14 despite the weak

1H14 sales which only made up 32% of our estimate. This will mainly be driven by the recent launches with total GDV of RM463m from projects such as OneSouth Phase 5, Metia Residences@Shah Alam and Sentrio Suites@Desa Pandan, which we understand has promising booking.

 We also believe that the 2H14 billings and earnings would likely be stronger on recognition of completion of

OneSouth Phase 1 and the initial billings from new launches as the construction works for these projects already commenced prior to the launches.

Change to Forecasts We have revised our FY14E earnings lower by 12.7% due to commencement of new projects, which gives lower-than-expected margins at the start-up stage and the rollover of billings forward to FY15. However, we

raised our FY15 forecast by 6.7% after taking into account the positive net impact of higher billing and earnings adjustment. Meanwhile, we expect earnings to play catch-up in 2H14 when the new launches kick in hile the unbilled sales of RM559m provide one-year earnings visibility.

Rating Maintain OUTPERFORM We believe the measures under the coming Budget 2014 would not be a major dampener to demand especially for the affordable mass housing market which is HYB’s bread and butter.

Valuation  Maintaining our TP at RM2.91 which is on parity with our DCF-driven RNAV @ 10% WACC.

Risks to Our Call Unable to meet sales targets or replenish landbank.

Sector risks, including overly negative policies.

Source: Kenanga