This article first appeared in The Edge Financial Daily, on July 18, 2016.

Hua Yang Bhd
July 15 (RM1.77)
Maintain sell with an unchanged target price (TP) of RM1.87: We expect Hua Yang Bhd’s first quarter of financial year 2017 (1QFY17) results due on Wednesday to meet expectations. We estimate its 1QFY17 net profit to range between RM20 million and RM25 million, making up about 23% to 27% of our full-year earnings projection. This will represent a 16% to 33% year-on-year (y-o-y) contraction in earnings, largely due to lower sales recorded in the previous years. Hua Yang’s new sales hit a record in FY14, driven by overwhelming response to its Sentrio Suite, Metia Residence and Greenz @ One South in the Klang Valley, which were fully sold. But weak sales performance due to poor consumer sentiment and banks’ tight lending practice did not spare affordable housing developers like Hua Yang. The company suffered the worst sales performance in five years and only recorded RM337 million sales in FY16. The group’s latest unbilled sales reduced to RM463 million, from RM702 million a year ago. This provides the group with less than 12 months’ earnings visibility (0.8 times last FY revenue).

We understand that there were no new launches during 1QFY17. As such, we envisage its 1QFY17 sales to derive mainly from existing projects, such as Cube SoHo and Zeta serviced residence @ One South and Citywoods serviced apartments in Johor. Township developments in Perak and Johor are also expected to contribute stable sales of RM15 million to RM20 million each. Note that the company had ongoing stocks worth RM370 million available for sale as at March 2016. Given limited new launches during the quarter, Hua Yang is likely to record a sales decline on both y-o-y and quarter-on-quarter bases in 1QFY17 (1QFY16 sales: RM81.7 million; 4QFY16 sales: RM81.3 million).

Management had set a sales target of RM500 million for FY17, pinning its hopes on improving economic conditions and financial institutions relaxing their stance on mortgage lending in the second half of 2016 (2H16). The sales target growth of 48% is expected to be anchored by new launches worth RM721 million.

Astetica Residences (gross development value [GDV]: RM368 million) and Prai land (phase one’s GDV: RM220 million) are key launches for the year. Management shared that Astetica Residences and Prai land will feature affordable homes priced at about RM500,000 per unit.

We understand that the project in Prai has received the Certificate of Share Unit Formula or Sijil Formula Unit Syer (SiFUS) issued by the director of lands and mines, and the schedule of parcel was filed with the commissioner of building in June. Meanwhile, the SiFUS application for Astetica Residences has been submitted recently. Management estimates that it will take two to three months to obtain all approvals. This implies that these projects will be launched in September 2016, at the earliest. However, we see risk of further delays should consumer sentiment remains weak and banks’ stringent lending practices are here to stay.

We believe the 25-basis point cut in overnight policy rate (OPR) alone is unlikely to revive the overall housing market. Also, a cut in the OPR may not change banks’ prudent stance on loan approvals. All in, we believe the target set by Hua Yang to be a relatively tall order to achieve, judging from the current unfavourable market conditions.

There’s no change in our FY17 and FY18 earnings forecasts. To recap, we have trimmed our FY17 new sales forecast by 7.4% to RM374 million in our 2H16 strategy report. We introduce our FY19 estimates, where earnings are set to fall less steeply by 3% following a projected double-digit earnings contraction in FY17 and FY18. Our FY17/FY18/FY19 sales assumptions are RM374 million/RM471 million/RM630 million respectively.

We maintain our TP at RM1.87 (ex-bonus: RM1.40). Although Hua Yang has replenished GDV worth RM1.2 billion over the past two years, we do not expect the new lands to lift its earnings immediately. With limited earnings catalysts, we maintain our “sell” recommendation. — TA Securities, July 15