Hua Yang Berhad TP: RM2.03 (+88%) An Undiscovered Gem in The Property Industry Last traded: RM 1.08 BUY

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1 A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: C O M P A N Y U P D A T E Friday, 04 March, 2011 FBMKLCI: 1, Sector: Property Hua Yang Berhad TP: RM2.03 (+88%) An Undiscovered Gem in The Property Industry Last traded: RM 1.08 BUY THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Tan Kam Meng, CFA ext:1644 kmtan@ta.com.my We are initiating coverage on Hua Yang Berhad (HuaYang) with a BUY recommendation. We derived our target price based on a PE multiple of 6x CY11 EPS, which is at 50% discount to our target PER of 12x for smallcap property stocks. This represents an attractive upside of 88%. Hua Yang Berhard (HuaYang) is a homegrown property developer with a market capitalization of RM116mn. Listed in 2002, HuaYang currently has 5 on-going developments namely One South and Symphony Heights in the Klang Valley, Bandar Universiti Seri Iskandar in Perak, Taman Pulai Indah in Johor and Senawang Link in Seremban. The Chairman Tan Sri Dato Seri Dr. Ting Chew Peh is an independent nonexecutive director of HuaYang. He was the Secretary-General of MCA during Meanwhile, the current day-to-day operation of HuaYang is at the helm of CEO, Ho Wen Yan, who is an architect by profession. Currently, the Ho family owns 33% of HuaYang. Investment case 1) Niche player to benefit from 2011 Budget; 2) One South to be the key earnings driver; 3) Trading at steep discount to NTA. We project Hua Yang to chalk up new sales of RM300mn for FY11, RM355mn for FY12 and RM336mn for FY13. Based on a chew rate of 43-58%, we expect net profit of RM25mn for FY11, RM40.4mn for FY12 and RM52.7mn for FY13. Earnings Summary (RM mn) FYEMar 31 FY09 FY10 FY11F FY12F FY13 Reve nue EBITDA EBITDA ma rgi n (%) Pre ta x profi t Ne t profi t Core ne t profi t EPS* (s e n) EPS growth (%) PER (x) GDPS* (s e n) Div yield (%) Core ROE (%) * Adjusted for 1:5 bonus issue Share Information Bloomberg Code Stock Name HYB MK HUAYANG Stock Code 5062 Listing Main Market Share Cap (mn) Market Cap (RMmn) Par Value wk Hi/Lo (RM) 1.27/ mth Avg Daily Vol ('000 shrs) Estimated Free Float (%) Beta 0.49 Major Shareholders (%) Forecast Revision Heng Holdings Cham Poh Meng FY11 FY12 Forecast Revision (%) - - Net profit (RMm) Consensus TA's / Consensus (%) Previous Rating na Financial Indicators FY11 FY12 Net Debt / Equity (%) FCPS (sen) Price / CFPS (x) nm ROE (%) ROA (%) NTA/Share (RM) Price/NTA (x) Share Performance (%) Price Change HUAYANG FBM KLCI 1 mth (1.8) (1.6) 3 mth mth mth Page 1 of 8

2 Background Hua Yang Berhard (HuaYang) is a homegrown property developer with a market capitalization of RM116mn. Listed in 2002, HuaYang has completed >10,000 commercial and residential properties worth RM1.16bn over the past 30 years. Currently, it has 5 existing developments namely One South and Symphony Heights in the Klang Valley, Bandar Universiti Seri Iskandar in Perak, Taman Pulai Indah in Johor and Senawang Link in Seremban (see Appendix 1). On top of that the group has 2 new projects in the pipeline namely, Taman Pulai Hijauan and Polo Park Land in Johor. Share Price relative to the FBM KLCI Major shareholders and management The Chairman Tan Sri Dato Seri Dr. Ting Chew Peh is an independent nonexecutive director of HuaYang. He was the Secretary-General of MCA during Meanwhile, the current day-to-day operation of HuaYang is at the helm of CEO, Ho Wen Yan, who is an architect by profession. Currently, the Ho family owns 33% of HuaYang. Source: Bloomberg Operating track record HuaYang s FY10 earnings surged 32% YoY to RM11.6mn underpinned by higher progress billings and margin improvement. For 9MFY11, the group has recorded a net profit of RM16.9mn, representing 46% above FY10 s total net profit. During this period, the group has locked in RM173mn sales and subsequently secured an en-bloc sale of 73 units of retail shops at One South worth RM105mn in Jan-11. The group is on track to achieve its sales target of RM300mn for FY11. Chart 1: Financial Performance RM'mn % MFY11 Revenue PBT PBT margin 0.00 HuaYang s net cash level dwindled in FY09, sending the net gearing ratio to 15% from 4% in FY08. This can be attributed to the capital outlays for landbanking exercises. In 2008, HuaYang spent RM40mn to acquire a acres leasehold land (the project is now known as One South) located along the Sungai Besi Highway. Also, the company spent RM7mn for another land acquisition in Johor in The landbanking exercise in 2008 has helped to boost sales in subsequent years (see Chart 2). As shown below, sales picked up significantly from 2009 onwards. In addition, the launch of One South in FY11 has boosted HuaYang s sales to the record level of RM170.5mn in 9MFY11 (note that 9MFY11 sale does not reflect the en-bloc sale worth RM105mn, which was completed in 4QFY11). Page 2 of 8

3 Chart 2: Sales Increased Significantly Since FY09 RM'mn FY2009 FY2010 9M2011 Taman Pulai Indah Bandar Universiti Seri Iskandar Symphony Heights One South Senawang Link Industry Structure In mid 2009, the property industry has entered into its first phase of recovery, underpinned by 1) low mortgage rates; 2) easy financing schemes launched by developers such as 5/95 or 10/90 schemes. We saw launches of mid- to highend properties mushrooming to cater for the increasing demand from upgraders. In 2010, NAPIC data shows a significant increase in demand for properties that priced at >RM500,000/unit. We believe the overwhelming demand is not due solely to the current low mortgage rates and the easy financing schemes, but also to the change in consumer preference toward lifestyle living. In Budget 2011, there are a number of new measures introduced to encourage buying interest like: 1) 50% exemptions on stamp duty on instrument of transfer and loan agreement on a house price not exceeding RM350,000 for first-time home buyers; 2) Cagamas to provide guarantee on the down payment of 10% for houses below RM220,000 for first time home buyers with household income less than RM3,000 per month; 3) Raising the maximum loan eligibility of civil servants to RM450,000 compared with RM360,000 currently. We expect this to drive property sales and prices higher in the near term, especially for those low- to mid-end houses. This bodes well to HuaYang as a developer of affordable properties. Investment case 1) Niche player to benefit from 2011 Budget; 2) One South to be the key earnings driver; 3) Trading at steep discount to NTA. Niche player to benefit from 2011 Budget HuaYang is expected to roll out RM2bn new launches for the next two years, focusing on the affordable range, ie: properties priced in between RM90k-400k, to cater for the overwhelming demand from the relatively large underserved target market. Having said that, the products offered by the group, typically those in Perak and Johor, are generally priced in between RM100k-300k/unit. As such, we expect the company to benefit from the housing incentives such as the 50% waiver on stamp duty on instrument of transfer and loan agreement proposed by the government in 2011 budget. We understand that the waiver is extended to only first-time home buyers who constitute up to 70% of the group s total customers. Page 3 of 8

4 One South to be the key earnings driver One South is located along the busy KL-Seremban highway, facing the Mines Lake and Palace of The Golden Horses Hotel. This development is accessible via a trunk road in front of the New Nouvelle Hotel (previously known as Mint Hotel). It is well connected to shopping centres (Jusco Taman Equine, Mines Shopping Fair and South City Plaza), hospital (Serdang Hospital), and universities (UPM). With a total GDV of RM750mn, One South will be developed in 5 phases, featuring 384 units of retail shops and offices (Phase 1), 1,261 units of serviced apartment (Phase 2-4), and two block of office towers (Phase 5). The group has soft-launched office units in Feb-2010 and has seen 30% take-up rate for 6- months after the launch. For the shop units, HuaYang has sold the entire 73 units retail shops on an en-bloc basis for RM105mn early this year. HuaYang has soft launched two blocks of serviced apartment with an average built-up area of 1,000sf. The indicative price in between RM psf is comparable to other development in the vicinity. Referring to iproperty.com, we surmise that the current market value of high-rise residential in Seri Kembangan and Sri Petaling to be in the region of RM psf based on the asking price for Bayan Villa, East Lake Condominium and The Heritage Residence in Seri Kembangan and Endah Promenade in Sri Petaling. According to management, the company has sold almost all units in one of the blocks, thanks to the easy 10/90 financing scheme. Being the key earnings contributor, we project One South to contribute RM92-108mn to FY11-13 sales. Earnings wise, we project this development to contribute up to RM27mn-28mn EBIT for FY12-13 based on a margin of 22%. Trading at steep discount to NTA Based on the group s NTA/share of RM1.87/share, the stock is currently trading at a steep discount of 0.6x P/NTA. Hua Yang recorded RM278mn sales for 10MFY11 with unbilled sales of RM194.4mn as at Jan We project Hua Yang to chalk up new sales of RM300mn for FY11, RM355mn for FY12 and RM336mn for FY13. Based on a chew rate of 43-58%, we expect net profit to grow at a promising rate of % to RM25mn for FY11, RM40.4mn for FY12 and RM52.7mn for FY13. Assuming HuaYang would distribute 4 sen dividend for FY11-13, yielding 4%, NTA is expected to increase to RM1.92/share in FY11, RM2.26/share in FY12 and RM2.71/share in FY13. At the current trading price of RM1.08, this represents x FY11-13 NTA/share, which is at steep discount if compared to its peers NTA/share of 1.31x. Valuation HuaYang s CY11 PE multiple of 3.2x is unjustifiable given our projected earnings growth rate of % YoY for FY Also, the PE is relatively low if compared to small- to mid-cap property companies under our coverage (refer to Table 1). Despite the exponential growth in future earnings, we acknowledge the risk factors given that HuaYang s earnings base and market capitalization are small. Also, its relatively thin daily trading volume of 442k shares/day renders the stock unattractive to its peers. As such, we peg a discount of 50% to our target PER of 12x for small- to mid-cap property companies to factor in the risk components and derive a fair value of RM2.03/share, which implies a P/NTA of 0.9x. Given a return of 88%, we initiate coverage on HuaYang with a Buy recommendation. Page 4 of 8

5 Table 1: Peer Comparison Company Call Price TP Earnings growth (%) PER (x) ROE (%) Div Yield (%) (RM) (RM) CY11 CY12 CY11 CY12 FY11 FY12 FY11 FY12 SP Setia Buy Mah Sing Buy Glomac Buy KSL Buy Encorp Buy Crescendo Buy Sector PER (Simple Average) Sector PER (Weighted) Small Cap PE Hua Yang Buy Table 2: Income statement FYEMar 31 FY09 FY10 FY11F FY12F FY13 Revenue EBITDA Depreciation (0.6) (0.4) (0.5) (0.9) (1.2) Amortisation (0.0) (0.1) (0.2) (0.3) (0.3) Finance cost (0.7) (0.5) (1.0) (1.9) (1.9) Pretax profit Net profit Core net profit EPS (sen) EPS growth (%) PER (x) GDPS (sen) Div yield (%) Core ROE (%) EBITDA margin (%) PBT margin (%) Net margin (%) Page 5 of 8

6 Table 3: Balance sheet FYE Mar F 2012F 2013F PPE Land held for development other Total non current assets Property development costs Inventories Trade and other receivables Current tax assets Deposit and cash Other Total CA Trade and other payables Borrowings Others Total CL Net current asset Share capital Share premium Reserves Total shareholders' funds MI Term loan Others Total non current liabilities Table 4: Cash flow statement FYE Mar F 2012F 2013F PBT Op profit before change in WC CFO Ca pe x (30.0) (33.6) (35.0) (35.0) (35.0) Othe rs CFI (28.3) (35.1) (35.0) (35.0) (35.0) Ne t borrowi ngs Di vi de nd (1.7) (1.7) (4.3) (4.3) (4.3) CFF (4.3) Change in cash 11.4 (13.9) Table 5: Financial analysis FYE Mar F 2012F 2013F Current ratio (x) Net gearing (%) NTA/share (RM) P/NTA (x) ROE (%) ROA (%) FCF per share (sen) (16.7) (20.7) (9.3) EV/EBITDA (x) Page 6 of 8

7 Appendix 1: On-going projects One South, Seri Kembangan GDV: RM750mn Leasehold Selling price: - Retail : RM psf - Office: RM psf Mixed development comprising: - 1,261 units of serviced apartment : soft launched 61 units units of shops/office : sold 73 retail shops en-bloc - 2 block office towers : future development Symphony Heights, Selayang GDV : RM206mn Leasehold Selling price: RM135,200-RM306,500 per units Serviced apartment: units (phase 1) : Sold units (phase 2) : Sold units (phase 3) : Sold Bandar Universiti Seri Iskandar, Perak GDV: RM721mn Leasehold Selling price: - Residential: from RM119,800/unit - Commercial: from RM260,000/unit Land size: 777 acres - Developed: 255 acres (GDV: RM158mn) - On-going: 29 acres (GDV: RM53mn) - Undeveloped: 523 acres (GDV: RM510mn) Page 7 of 8

8 Taman Pulai Indah, Johor GDV: RM818mn Freehold Selling price: - Residential: RM134,000-RM300,000/units - Commercial: from RM150,000/units Land size: 477 acres - Completed: 286 acres (GDV: RM465.4mn) - On-going: 103 acres (GDV: RM134mn) - Undeveloped: 88 acres (GDV: RM198mn) Senawang Link, Negeri Sembilan GDV: 45mn (85 units shops and factories) Leasehold Selling price: - Phase 1: from RM251,000/unit Commercial and industrial development comprising: - Phase 1: 22 units 1 1/2 terrace factories 30% sold Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD (14948-M) MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 8 of 8