HUAYANG’s 1Q18 CNP of RM1.7m was disappointing, accounting for 2.8%/2.3% of our and streets’ full-year estimates. 1Q18 sales of RM52.2m was also behind our and management full-year target of RM331.0m and RM400.0m, respectively. No dividend declared as expected. Reduced FY18-19E CNP by 30% respectively. Downgrade to UNDERPERFORM with a lower Target Price of RM0.95 (previous, MARKET PERFORM; TP: RM1.14).

Below expectations. Its 1Q17 CNP came in below expectations accounting for 2.8%/2.3% of our and streets’ full-year estimates. Its 1Q17 property sales of RM52.2m was also behind our and managements’ full-year target of RM331.0m and RM400.0m, respectively. The poorer than expected performance stems from the following reasons, i) slower than expected progressive billings recognised due to timing issues as its newly launched projects have yet to reach a significant billing stage, and ii) higher costs partly due to the interests cost incurred for the acquisition of the 30.9% stake in MAGNA. No dividends declared as expected. While its lower than expected sales are due to the poor response from its Klang Valley project, i.e. Astetica.

Results highlight. 1Q18 CNP saw a drastic decline of 93%, YoY as its revenue came off by 63%, and its pre-tax margins down by 19ppt to 6% coupled with a higher effective tax rate of 39% (+13ppt, YoY). The sharp drop in revenue was mainly due to timing issue as its newly launched projects have yet to reach a meaningful billing stage which resulted in the slump in revenue, while the compressions in pre-tax margin were due to higher operating cost and also higher interest costs incurred in acquiring the 30.9% stake in MAGNA. On QoQ basis, the 82% declines in its 1Q18 CNP were also due to similar reasons above.

Outlook. Going forward, we would not expect any major land bank activities from HUAYANG, as we believe that they need to focus on their future launches and also future plans with MAGNA, considering their unbilled sales, which have fallen to a low of RM204.0m which would only be adequate for another 1-2 quarters, and we opine that HUAYANG should be more aggressive driving its sales from its launched projects, which have received slow response from the market. Nonetheless, we do not rule out potential cash call exercise if HUAYANG acquires the remaining c.70% stake in MAGNA in the future.

Reducing FY18-19E earnings. Following its weak result, we slashed our FY18-19E CNP by 30%, respectively after factoring in a higher operating cost and retimed our billing progress. That said, we also reduced our FY18-19E sales target by 24%-29% to RM253.0m and RM322.3m, respectively.

Downgrading to UNDERPERFORM. Following our reduction in earnings due to its weak performance, we are downgrading HUAYANG to UNDERPERFORM with a lower Target Price of RM0.95 (previously, MP; TP: RM1.14) as we apply a steeper discount factor of 70% to its RNAV of RM3.10 (previous discount factor at 63%) higher than its peak of 65.8% due to its consecutive disappointment in achieving its sales target and earnings delivery.

Risks to our call includes: (i) Stronger-than-expected sales, (ii) Lower-than-expected administrative costs, (iii) Positive real estate policies, (iv) Conducive lending environments, and (v) Higher-thanexpected dividend pay-out.

Source: Kenanga Research - 14 Jul 2017