HUAYANG’s 1Q17 net profit of RM23.9m came in within expectations, accounting for 23% of our and consensus’ full-year estimates. Property sales of RM53.2m remains softer than expected vis-à-vis our and management’s target of RM400m and RM500m, respectively. This was mainly due to lack of new launches coupled with a slow market. No dividend announced as expected. Maintain MARKET PERFORM with unchanged Target Price of RM1.83.

Repositioning for FY17. At its briefing, management highlighted that FY16 sales had been slower than expected owing to poor property market sentiment as home buyers adopted a wait and see stance coupled with high loan rejection rates, which prompted them to delay some initial planned launches, i.e. Astetica, Mines South (GDV: RM368.0m) to focus on clearing “inventories” (GDV: RM370.7m) from previously launched projects.

Weak sales… 1Q17 net profit of RM23.9m was within expectations, accounting for 23% of our and consensus’ full-year estimates, respectively. However, its 1Q17 property sales of RM53.2m was short of our and management’s full-year sales target of RM400.0m and RM500.0m due to lack of new launches coupled with slowdown in the property market. No dividend declared as expected.

A softer year… Its 1Q17 net profit was down by 20% YoY on the back of lower revenue registered (-10%) due to slower construction recognition for its on-going projects. Likewise, it registered an improvement in net profit by of 12%, QoQ despite a flattish revenue, mainly driven by better cost efficiencies, which resulted in better operating margins of 26% (+5ppt). However, its net gearing inched up to 0.50x from 0.34x in 4Q16 due to the drawdown of borrowings for the purchase of its Prai and Kota Masai land.

Outlook. For FY17, management aspires to achieve its sales target of RM500.0m driven by its planned launches amounting to RM721.0m worth of projects, i.e. Astetica (GDV: RM368.0m), landed residential in Johor (GDV: RM33.0m), BUSI, Perak (GDV: RM100.0m) and Prai, Penang (GDV: RM220.0m). However, we still opt to maintain our sales estimates at RM409.2m as we maintain a cautious view on the property market.

FY17-18E earnings maintained. We are still keeping our FY17-18E earnings unchanged at RM106.1m and RM96.7m, respectively. Unbilled sales of RM410.1m provide earnings visibility for a year.

Maintain MARKET PERFORM. There are no changes to our MARKET PERFORM rating with a Target Price of RM1.83 based on an unchanged RNAV discount of 48% to its RNAV of RM3.52. While dividend yields are less exciting and property market outlook is challenging, the 48%-applied discount is lower compared to the sector average of 59% due to their positioning in the affordable housing space, as their property projects are normally priced at the range of RM500k/unit. Our TP implies FY17-18E PER of 4.6x-5.0x.

Risks to our call include (i) Weaker-than-expected property sales, (ii) Higher-than-expected sales and administrative costs, (iii) Negative real estate policies, (iv) Tighter lending environments, and (v) Higherthan- expected dividend pay-out.

Source: Kenanga Research - 21 Jul 2016