We returned from HUAYANG analysts’ briefing feeling slightly neutral on the overall property market. The management lamented that the tighter lending environment is slowing its conversion of bookings to SPA sales. However, we remain positive on the longer-term prospect, as we believe that HUAYANG would be the first to benefit should banks start turning on the “tap” again post GST implementation due to their strong positioning in the affordable housing segment. Hence, we are maintaining our OUTPERFORM call on HUAYANG with an unchanged TP of RM2.60 based on 26% discount on its RNAV of RM3.52. Its FY15-16E dividend yields remains fairly decent at 5.6-5.9% which is still within the range of mid-cap peers of 4.0-6.0%, coupled with the fact that its currently trading at only 6.1–5.7x FY15-16E PER below its mid-cap peers’ average of 8.0-7.0x.

On-going projects progressing well. Its unbilled sales remain healthy at RM717.9m, providing the group at least another 1.5 years earnings visibility. Management are quite happy with the current progress of its on-going projects i.e. Gardenz @ One South, Taman Pulai Indah, Taman Pulai Hijauan, Bandar University Seri Iskandar which are progressing within timeline. Management is also confident of maintaining its current operating efficiencies given that the excess capacity in labour force for building projects. To recap, its Gardenz @ One South (GDV: RM152.0m) is expected to be completed by 4QCY14 and we expect better earnings contribution from that project to HUAYANG’s bottom line in 2H15.

Landbanking at the right time. Management reiterated that land banking would remain a core focus in the near to medium term and management take comfort that there are a plenty of land banking opportunities under the current property market conditions. Hence, the management is still exploring the best available landbanks at the right pricing especially in the new markets i.e. Penang Mainland and Kota Kinabalu, Sabah and remains hopeful they should be able to replenish its GDV by another RM500.0-RM800.0m in the next six months. Management expects net gearing to shoot up to 0.8x at most should they drawdown the entire RM250.0m bond facility. We would prefer if the company considers some cash calls to pare down its debt quickly as we prefer developers keeping net gearing below 0.6x.

Caution slower sales ahead. As we gathered from management, the demand for affordable housing projects in the market remains fairly strong. However, the overall property sales remains slow as house buyers are still accessing the potential impact of GST on their disposable income coupled with stringent bank loan approvals whereby the loan application dropout rate is as high as 40%. Hence, management is expecting sales to improve 3–6 months post GST implementation, as house buyers especially in the affordable segment would have a better picture on their financial position as to whether they afford a house. As such, we are lowering our FY15E sales estimates by 12% to RM582.3m (-20.8% YoY) from RM665.2m previously as we anticipate sales to progress slower as bank loan approval rates remains relatively slow; our FY15 sales estimates of RM582.3m is still inline with management’s sales target of RM500.0m – RM600.m.

Fine-tuned FY16E earnings. We fine-tuned our FY16E earnings by -4.0% from RM113.7m to RM109.6m as a result of our lower sales estimates in FY15E. There are no changes to our FY15E earnings of RM102.9m as most of the earnings are well supported by unbilled sales of RM717.9m and timely progression of its ongoing projects.

OUTPERFORM maintained. Although it has been challenging in terms of the conversion of booking sales to SPA due to tighter lending environments, it appears to be affecting everyone across the board. HUAYANG, as an affordable housing player, stands a better chance of survival given the wider demand pool of mass housing buyers. Thus, we continue to reiterate our OUTPERFORM call on HUAYANG with an unchanged Target Price of RM2.60 based on 26% discount on its RNAV of RM3.52 (factored in RM1.67b worth of GDV replenishments) given its steady earnings growth of 25.2% in FY15E underpinned by a strong unbilled sales of RM717.9m coupled with its strong positioning in the affordable housing where demand remains resilient. HUAYANG would also be the first to benefit should banks start turning on the “tap” again in the future. Dividend yields for FY15-16E remains fairly decent at 5.6-5.9% which is still within the range of its mid-cap peers of 4.0-6.0% and it is currently trading at only 6.1– 5.7x FY15-16E PER which is still below its mid-cap peers’ average of 8.0–7.0x. We also believe that should there be any landbanking news in the near term, it could potentially boost the share price.

Source: Kenanga