9M18 CNP of RM1.3m was below expectations at 24%/20% of our and street’s full-year estimates, due to unexpected losses from its associates which we believe could be from provisioning/write-off on certain projects from MAGNA. 9M18 property sales of RM138.0m are also below our target of RM219.0m. Reduced FY18E earnings by 44%, while keeping FY19E unchanged. Maintain MP with lower TP of RM0.600 (previously, RM0.630).

Below expectations. 9M18 CNP of RM1.3m came in weaker than expected, accounting for 24%/20% of our/street’s full-year estimates, respectively. The major shortfall is likely due to the unexpected losses from its associates which we believe could be from provisioning/write- off on certain projects from MAGNA. For its 9M18 property sales, HUAYANG registered RM138.0m worth of sales which is still lagging behind our sales target of RM219.0m.

Results highlight. 9M18 CNP saw drastic decline of 97%, YoY, premised on several factors; (i) decline in revenue (-53%) due to timing of recognition as its newly launched projects have yet to reach meaningful billing stage coupled with weak sales, and (ii) compression in pre-tax margins (-18ppt) due to the loss of economies of scale due to the slump in revenue coupled with high fixed overhead and financing costs (>1000%) incurred for the investment in MAGNA. QoQ, the RM1.0m losses for 3Q18 are mainly due to the losses of RM2.5m from its associate which we believe could be from provisioning/write-off on some of MAGNA’s past projects.

Outlook. Going forward, we do not expect any more major land banking activities as we believe that HUAYANG needs to focus on realizing their pipelines and also future plans with MAGNA. Unbilled sales have fallen to a historical low level of RM161.6m, 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. Nonetheless, we believe HUAYANG still stand a chance of meeting our FY18E sales target of RM219.0m, should they launch their Puchong project by end of this month.

FY18E earnings lowered. Post results, we reduced our FY18E earnings down by 44% after factoring in the provisioning/write-off from its associate which contributed RM2.5m in 3Q18. However, we are maintaining our FY19E earnings for now as we are expecting its prospects to improve as sales pick up pace from its on-going marketing efforts and also the launch of its Puchong project (GDV: c.RM200.0m).

Maintain MARKET PERFORM. Despite the disappointment in earnings, we are still keeping our MARKET PERFORM call with a lower Target Price of RM0.600 (from RM0.630) on HUAYANG, as we widen our RNAV discount to 80% (previously, 79%) which is at -2.5SD levels. However, we believe there is limited earnings risk in FY19 and we do not expect more provisioning from its associate, i.e. MAGNA in the near term.

Risks to our call include; (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 - 25 Jan 2018