News  In a press release yesterday, Hua Yang Berhad (“HUAYANG”) announced that they have acquired two parcels of land in Bukit Mertajam, Penang measuring 4.90 acres (RM22.0m@RM103psf) and 3.14 acres (RM9.0m@RM66psf) for a total consideration of RM31.0m.

Comments  We were not surprised with the land acquisition, as it has always been management’s key focus to replenish landbank, which was highlighted in our previous report dated 22-Jan-15. However, this particular land acquisition would mark HUAYANG’s maiden foray into the Penang (mainland) property market.

 The combined GDV of both parcels is estimated at RM314m (RM243m @ 4.9ac, RM71m @ 3.14ac). The proposed development for its 4.90 acres land would be for serviced apartments & retail lots while the 3.14 acres land is solely for residential high-rise (condominium) purpose. Both lands are located within the established area of Bukit Mertajam town center (refer overleaf for location on map).

 The total purchase consideration of RM31.0m for both parcels of land is fair as it works out to be only 9.8% of its combined GDV or well below our 20% threshold. However, do note that we would expect its net gearing to climb from its current level of 0.50x as of 9M15 to 0.57x post acquisition of both parcels of land. As a rule, we generally prefer that developers maintain a net gearing of less than 0.5-0.6x in case the property market experiences a longerthan- expected lull. While the acquisition is a positive for the group, the acquisitions only increase their remaining GDV by 11% to RM3.1b. This also makes up part of our RM1.67b GDV replenishments assumption in our FD RNAV calculations.

Outlook  Expect more landbanking news flow over the next 12 months as they have a Sukuk program of RM250.0m in place. As highlighted earlier, with relatively higher than average net gearing for a developer, cash calls would be welcomed to finance landbanking over further gearing.

Forecast  No changes to our FY15-16E earnings.

Rating Maintain MARKET PERFORM  We reiterate our MARKET PERFORM call on HUAYANG with an unchanged Target Price of RM2.20. While we still like HUAYANG for its edge in the affordable housing segment where demand remains highly resilient, they have also fallen victim to the ‘lower income earners’ trap.

Valuation  There are no changes to our Target Price of RM2.20 that is based on 38% discount to its RNAV of RM3.52, as we had previously factored in RM1.67b worth of GDV replenishments into our RNAV. 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 will exceed 0.5x post this particular land acquisition and thus, we are comfortable with our valuations.

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