HUAYANG is acquiring 19.8 acres of freehold land in Kajang for RM70.0m or RM81.3psf. While we are positive on its land bank being replenished, we remain concerned with its high net gearing levels of 0.70x (as of 2Q18). We upgraded our call to MARKET PERFORM (from UNDERPERFORM), albeit the reduction in Target Price to RM0.630 (from RM0.650) as we believe there is limited earnings risk as we enter into FY19.

News. Yesterday, HUAYANG announced that they are acquiring 4 parcels of freehold land measuring 19.8acres for a total consideration of RM70.0m or at RM81.3psf. The land is adjacent to Kajang 2 development and is accessible via Jalan Reko via Kajang SILK Highway.

Year-end surprise! We were surprised with HUAYANG’s land banking move as we were not expecting any land banking activities for the year given its high net gearing of 0.70x (as of 2Q18). Management have an estimated GDV of RM800.0m for these 4 parcels of land, which we believe is fair, as it would translate to an average selling price of RM300/sf derived from 4x plot ratio, enabling them to position their product below RM500.0k per unit in Klang Valley for the affordable segment. In terms of land cost, we deem that it is reasonable as the land cost to GDV ratio of 8.8% is still within our comfortable range of 15-20%. While we are positive with its land bank replenishment, we remain worried about its high net gearing of 0.70x (as of 2Q18) which is set to reach 0.82x upon complete of the deal.

Outlook. Going forward, we are not expecting any more major land banking activities as we believe that HUAYANG needs to focus on realizing their pipelines and also future plans with MAGNA. Considering their unbilled sales, which have fallen to a historical low level 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 that 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. As we believe that the average selling price of RM300 psf for its Kajang land is reasonable in the long term, we think that HUAYANG will need to step up its marketing efforts, as they are set to face stiff competition from other developers in Kajang given that the current pricing for condo/apartments ranges between RM240-260psf.

FY18/19E earnings. Following its land banking move, we maintain our FY18/19E earnings for now as we are only expecting the earliest launch from these 4 parcels of land to take place in FY20.

Upgrades to MARKET PERFORM. While we upgrade our call to MARKET PERFORM (from UNDERPERFORM) as we believe that there is limited earnings risk in FY19, we lowered our Target Price to RM0.630 (from RM0.650) underpinned by the reduction in RNAV to RM3.00 (previously, RM3.10) as we reduced our projects margin assumption but with an unchanged discount factor of 79%, which is at - 2.5SD levels.

Risks to our call includes: (i) Lower-than-expected sales, (ii) higher- than-expected administrative costs, (iii) negative real estate policies, (iv) less conducive lending environments, and (v) lower-than-expected dividend pay-out.

Source: Kenanga Research - 28 Dec 2017