Period  2Q15/1H15

Actual vs. Expectations  Hua Yang Bhd (HUAYANG)’s 1H15 core earnings of RM49.9m were within expectations, making up 48.5% and 49.2% of our full-year estimates and street consensus.

 1H15 sales of RM192.2m is proportionately behind our sales estimates at only 29% of our full-year sales estimates of RM665m. However, this is expected as we have timed most of their launches in 2H15; (i) the final phase of One South (GDV: RM185.0m), (ii) Citywoods (RM216.0m) in Johor was only launched recently, and (iii) Puchong West (GDV: RM300.0m) is expected to be launched by 2H15.

Dividends  No dividend was declared in 1H15 as expected.

Key Results Highlights  YoY, HUAYANG’s 1H15 core earnings of RM49.9m saw an impressive improvement of 103% from RM24.6m

previously. The huge improvement in its core earnings are mainly driven by 52% increase in revenue coupled with an expansion on its EBITDA margins to 25.0% (+6.3ppt) from 18.7% previously due to better progressive billings from its existing projects, i.e. One South project (the Gardenz) in Kuala Lumpur and landed residential projects, namely; Bandar University Seri Iskandar in Perak, Taman Pulai Indah and Taman Pulai Hijauan in Johor. As for 2Q15, its core earnings of RM26.0m (+111.0%) were also mainly driven by the reasons above.

 QoQ, HUAYANG’s 2Q15 core earnings improved by only 9% from RM23.9m to RM26.0m while its revenue was rather flattish at RM139.5m (+2.0%) as it continued to see improvements in margins. Its pre-tax margin saw a marginal improvement of 1.3ppt to 25.2% as most of its projects has reached advanced stage, especially its landed residential projects in Johor (Taman Pulai Indah, and Taman Pulai Hijauan) and the 3rd phase of One South namely the Gardenz that is almost completed, coupled with the higher contribution from other income of RM0.9m that improved by 44%. Notably, its net gearing also saw gradual improvements as it ease off to 0.4x from 0.5x in 1Q15.

Outlook  We expect its earnings growth momentum to continue, underpinned by strong unbilled sales of RM717.9m with at least 1.5 years of earnings visibility and launches worth RM1.1b for FY15 out of which HUAYANG has already launched 56%. Its mixed development project in Puchong, namely; Puchong West is expected to be launched in 2H15.

 We are still expecting land banking news flow from HUAYANG in the next 6-12 months as the management already has RM250m Sukuk program ready solely for landbanking purposes.

Change to Forecasts  No changes to earnings forecast.

Rating Maintained OUTPERFORM

Valuation  We are keeping our OUTPERFORM call with an unchanged Target Price of RM2.60 that is based on 26% discount to its RNAV of RM3.52 in which we have factored in c.RM1.67b worth of GDV replenishments. We continue to like to stock for its edge in the affordable housing segment where demand remains highly resilient.

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

 Balance sheet risk should its net gearing persistently stays above 0.5x.

 Sector risks, including overly negative policies.

Source: Kenanga