We came back from HUAYANG’s briefing feeling NEUTRAL as there were no major new updates from the previous quarter. As it is, FY16’s planned launches of RM648.0m are on track, while its sales target of RM500.0m is still achievable backed by new and on-going projects. Nonetheless, we are keeping our slightly more conservative FY16 sales estimates of RM482.0m and made no changes to our FY16-17E earnings. The group continues to focus on finding new landbanking opportunities. We maintain OUTPERFORM call on HUAYANG with an unchanged Target Price of RM2.20 that is based on a 38.0% discount to its RNAV of RM3.52, as we still like the stock for its positioning in the affordable housing market space, and at current levels, it is trading at an undemanding valuation of FY16E PER of 4.3x coupled with a highly attractive dividend yield at 7.2%, vis-à-vis its small-mid cap developer peers’ average of 7.9x and dividend yield of 4.3%.

RM648m worth of launches in FY16. While its 1H16 sales of RM174.8m came below our expectation, underpinned by the lukewarm response from the market due to the wait-and-see approach from home buyers and tight credit control affecting HUAYANG’s potential buyers who are experiencing high loan rejection rates c.50% from banks, coupled with bulk of its new launches skewed towards 2H16. That said, its 2Q16 sales of RM93.1m is an improvement (+13.5%, QoQ), and management remains hopeful for this particular trend to continue. Hence, they are still keeping their launch target of RM648m for FY16, of which the bulk will be from Mines South (GDV: RM368m). As for Puchong West (GDV: RM1.35b), management indicated that while the development order approval process is taking longer than expected, their expected launch timeline remains on-track for FY17.

RM500m sales target maintained. Despite the challenges under current market conditions, management is still maintaining its FY16 sales target of RM500m by striving to clear off its “inventories” from previous launches i.e. One South Cube and Zeta (GDV: RM195.0m) which have achieved an overall take up rate of c.46% as of Sep-15, coupled with its planned new launches of RM648m. We are maintaining our FY16E sales of RM482.0m as we are banking hard on banks to loosen up lending requirements for first time home buyers, coupled with its launches skewed towards 2H16. Thus, our FY16-17E earnings remain unchanged.

Landbanking to continue! Yesterday, management indicated they are on the lookout for landbanking opportunities in the near term and they are close to securing more landbanking deals in the near term, and management highlighted that Penang Mainland is one of its preferred choices. We reckon that the upcoming GDV replenishment would easily be in the range of around RM500m, as it is their priority to replenish at least RM800m worth of GDV in the near to mid-term replacing its cancelled Selayang land deal. To date, HUAYANG has replenished at least RM494m worth of GDV in 1H16, and we are still expecting its net gearing to stay at 0.6x levels in FY16, as HUAYANG looks to secure another landbank of similar size with the Selayang land.

OUTPERFORM maintained. We maintain OUTPERFORM on HUAYANG with an unchanged TP of RM2.20 which is at a 38.0% discount to its DCFdriven RNAV @ 10.0% WACC of RM3.52. Our applied discount of 38.0% is slightly higher compared to its affordable housing developer peers’ discount rate of 25.0% i.e. MATRIX given its higher net gearing levels but still below our sector average of 55.0%. That said, at current levels, it is trading at an undemanding valuation of FY16E PER of 4.3x coupled with a highly attractive dividend yield at 7.2%, vis-à-vis its small-mid-cap developer peers’ average of 7.9x and dividend yield of 4.3%.

Source: Kenanga Research - 23 Oct 2015