1H18 CNP of RM2.3m was disappointing at only 5% of both our and streets’ full-year estimates. 1H18 sales of RM102.0m also came in behind our full-year target of RM253.0m. No dividend was declared as expected. Slashed FY18E/FY19E CNP by 88%/77% respectively. Downgrade to UNDERPERFORM with a lower Target Price of RM0.65 (previously, MARKET PERFORM; TP: RM0.85).

Below expectations. 1H18 came in sharply below expectations, accounting for 5% of both our and streets’ full-year estimates. The disappointment in earnings was driven by: (i) lower-than-expected billings, and (ii) higher-than-expected interest expense for the acquisition of the 30.9% stake in MAGNA. Its 1H18 property sales of RM102.0m also fell short of our full-year target of RM253.0m. Its earnings and sales performance are currently at a record low. No dividends declared as expected.

Results highlight. 1H18 CNP saw drastic decline of 94% YoY as revenue came off by 63% while pre-tax margins compressed by 19ppt to 5% coupled with higher effective tax rate of 53% (+27ppt, YoY). The sharp decline in revenue was due to timing of recognition since its newly launched projects have yet to reach meaningful billing stage while these projects also suffered from weak sales. Compression in pre-tax margin was due to the loss of economies of scale due to the slump in revenue coupled with high fixed overhead costs and interest expense (up by >600%) incurred for the acquisition of the 30.9% stake in MAGNA. Subsequently, its net gearing increased to 0.7x from 0.4x. QoQ 2Q18 CNP declined 66% due to higher effective rate of 72% vis-à- vis 39% in 1Q18 due to non-deductible expenses.

Outlook. Going forward, we would not expect any major land banking activities as we believe that HUAYANG need to focus on realizing their pipelines and also future plans with MAGNA. Considering their unbilled sales, which have fallen to historical low levels of RM209.0m which is only sufficient for another 1-2 quarters, we opine that HUAYANG should be more aggressive driving its sales from launched projects which received slow response from the market albeit its positioning as an affordable housing player (>50% of products priced around RM550k per unit) in Klang Valley, Penang and Johor. We also believe the recent Budget-2018 measures (step-up financing scheme) would increase the odds of better sales for HUAYANG. 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 88%/77%, respectively, after factoring in a higher operating cost and rescheduling of our billing progress. That said, we also reduced our FY18-19E sales target by 13%/23% to RM219.0m/RM249.7m, 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 RM0.65 (previously, MP; TP: RM0.85) as we apply a steeper discount factor of 79% which is at -2.5SD levels to its RNAV of RM3.10 (previous discount factor at 73%) which is wider than its historical peak of 73% 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-than- expected dividend pay-out.

Source: Kenanga Research - 30 Oct 2017