Period  3Q15/9M15

Actual vs. Expectations Hua Yang Bhd (HUAYANG)’s 9M15 core earnings of RM80.9m were within expectations, accounting for 78.6% and 80.4% of our full-year and consensus estimates, respectively. However, we qualify that our topline forecast was more aggressive than actual but was compensated by our lower than actual development margins.

 Its 9M15 sales of RM342m is still proportionally behind our estimate, making up only 59% of our full-year sales estimate of RM580m and management’s target of RM500m. This is the second consecutive quarter of headline sales disappointment. Sales was slower than expected, as most of its project launches i.e. Cube and Zeta @ One South (GDV: RM195m), and Citywoods (GDV: RM216m) were only launched on this quarter that is still within their targeted timeline, coupled with the wait-and-see stance taken by house-buyers prior the implementation of GST.

Dividends  First interim dividend of 5.0 sen was declared, as expected. For the full-year, we are expecting a total dividend of 13.3 sen which implies a net dividend yield of 6.2%.

Key Results Highlights YoY, 9M15 core earnings of RM80.9m surged by 82% from RM44.4 in the previous corresponding period. The impressive earnings performance was driven by the improvements in revenue (+38%) from strong billings and expansion in EBITDA margins (+6.2ppt) to 26.1% as a result of higher recognition from higher-margin projects, i.e. One South, Taman Pulai Indah and Taman Pulai Hijauan.

 QoQ, 3Q15 revenue improved by 11% to RM155.5m bringing its core earnings higher by another 19% to RM30.9m. Its pre-tax margin also saw an improvement of 2.6ppt to 27.8%. The improvements in revenue and pre-tax margin are mostly driven by existing projects that are already at advanced stage or close to completion, which tends to fetch higher margins, like the 3rd phase of One South namely Gardenz.

Outlook  Its unbilled sales remain flattish at RM733m with at least 1.5 years of earnings visibility.

 As for landbanking, we believe management should be able to replenish its landbank over the next 12 months as the management already has RM250m Sukuk program ready solely for landbanking purposes. However, we will be expecting more updates on its landbanking plans in the upcoming result briefing on 22-Jan-15.

 We expect a weak property market over the next 6-9 months and it appears that even the mass market has not been spared, largely due to tougher lending environments. Hence, we are reducing our FY15-16E sales estimate by 14%-12% to RM501m and RM529m, respectively.

Change to Forecasts Despite our revision in FY15-16E sales estimate, we are still maintaining earnings forecasts of RM102.9m and RM102.8m, respectively, as we factored in higher development margins to be more reflective of its actual margins while lowering our topline as a result of lower sales estimates.

Rating Downgrade to MARKET PERFORM

Valuation  We maintain our Target Price of RM2.20, which is based on 38% discount to its RNAV of RM3.52; note we have factored in c.RM1.67b worth of GDV replenishments. Our applied discount of 38% is below its historical average level of 34% due to the more challenging property landscape and the fact that its net gearing could exceed 0.5x should there be any sizeable landbanking and thus, we are comfortable with our valuations.

 The stock has achieved 4.9% YTD returns and we reckon this was largely on the back of the pre-CNY rally. However, we are reluctant to narrow their RNAV discount given the sector risks as highlighted above.

 While we still like the stock for its edge in the affordable housing segment where demand remains highly resilient, they have also fallen victim to the ‘lower income earners’ trap. Their buyers, which are typically genuine first home buyers, are not high income earners and thus, tend to face more obstacles when it comes to obtaining the ‘ideal’ margin of financing from banks.

 Coupled with two consecutive disappointments in property sales, we are downgrading HUAYANG to MARKET PERFORM (previously, OUTPERFORM) call. Dividend yields of 6.2%-6.2% for FY15-16E should provide some downside risk protection.

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