Hua Yang Berhad TP: RM1.09 (+2.4%) Subdued Results, Timely Launch of Projects the Key

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1 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 Thursday, 19 January 2017 FBMKLCI: 1, Sector: Property Hua Yang Berhad TP: RM1.09 (+2.4%) Subdued Results, Timely Launch of Projects the Key THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Last traded: RM1.06 Thiam Chiann Wen Tel: cwthiam@ta.com.my Sell Key takeaways from Hua Yang results briefing are: 1) FY17 sales target has been slashed to RM300mn from RM500mn previously, 2) more downside to earnings as unbilled sales dwindled, 3) little to cheer due to weak market environment. Therefore, post briefing, we remain unconvinced of the group s ability to secure another RM175mn sales in 4QFY17 alone amid the soft market conditions and strict lending environment. We cut our FY17/18/19 sales forecasts by 26%/12%/18% to RM241mn/RM384mn/RM485mn respectively. Based on an unchanged CY17 P/E target multiple of 6x, target price is reduced to RM1.09 share (from RM1.29/previously), following a 14-21% cut in FY17-19 earnings. We see the group s sluggish sales performance to continue putting some strain on its future earnings. Reiterate Sell. Cutting FY17 Sales Target by 40% to RM300mn Management has slashed its FY17 sales target to RM300mn, representing a 40% cut from its earlier guidance of RM500mn. This is by far the steepest cut in sales target for developers under our coverage see Figure 1. Figure 1: Developers Sales Target Revision Initial Target Revised Target Revision % Change (RM bn) (RM bn) Date SP Setia % Aug-16 Sunway % Oct-16 Mah Sing % Nov-16 Hua Yang % Jan-17 Source: Companies, TA Research The group recorded RM125.2mn new sales in 9MFY17, which only accounted for 42% of the group s revised sales target. According to management, 9MFY17 sales was largely driven by the sale of existing projects, as it has only launched RM15mn worth of new properties in the period under review. Specifically, sales of RM24mn recorded in 3QFY17 was the lowest in 27 quarters see Figure 2. Figure 2: Quarterly sales 1QFY11-2QFY17 Share Information Bloomberg Code HYB MK Stock Name HUAYANG Stock Code 5062 Listing Main Market Share Cap (mn) Market Cap (RMmn) Par Value wk Hi/Lo (RM) 1.45/ mth Avg Daily Vol ('000 shrs) Estimated Free Float (%) 58.4 Beta 0.6 Major Shareholders (%) Heng Holdings Forecast Revision FY17 FY18 Forecast Revision (%) (20.6) (13.9) Net profit (RMm) Consensus TA's / Consensus (%) Previous Rating Sell (Maintained) Financial Indicators FY17 FY18 Net Debt / Equity (%) FCFPS (sen) Price / CFPS (x) ROE (%) ROA (%) NTA/Share (RM) Price/NTA (x) Share Performance (%) Price Change HUAYANG FBM KLCI 1 mth mth (16.5) (0.2) 6 mth (20.6) (0.3) 12 mth (24.8) 2.2 (12mths)Share Price relative to the FBM KLCI Source: Bloomberg Page 1 of 5

2 Key projects to be launched in 4QFY17 (1QCY17) are Astetica Residence, Selangor (GDV: RM368mn, 568 serviced apartments with 26 retail units) and Meritus Residensi, mainland Penang (first phase GDV: RM220mn, 480 serviced apartments with 15 retail units) see Appendix 1. Both Astetica Residence and Meritus Residensi will feature serviced apartments priced from RM500k/unit and RM400k/unit respectively, in line with the group s strategy to offer affordable homes. In view of the generally weak market environment, the official launch of these projects have been delayed to 1QCY17 from 4QCY16 previously. Potential downside to earnings as unbilled sales dwindled Management aims to deliver modest profit performance in FY17. However, declining property sales since FY15 are putting some pressure on the group s profitability see Figure 3. Hua Yang s 3QFY17 quarterly profit of RM10.4mn was the lowest seen in recent 3 years. As a result of weaker sales, the group unbilled sales slid further to RM216mn as at Dec-16, the lowest level in recent years see Figure 4. We estimate the latest unbilled sales would only be able to provide the group with less than 12 months earnings visibility. Zooming into unbilled sales breakdown, Sentrio Suites, which are scheduled for completion in 4QFY17, make up 23% of the total unbilled sales. This suggests that the group s unbilled sales will deplete fast going into FY18, should it fail to generate sufficient new sales in the coming quarters. Figure 3: Quarterly Profit 1QFY11-2QFY17 Figure 4: Sales and unbilled sales trend Page 2 of 5

3 Little to cheer as management warns on weak market environment There is little to cheer over the 6 months as management warns on weak market environment. Management foresees that property sector will continue to be dampened by weak market sentiment and end-financing issues. In addition, the coming general election (GE 14), which is now widely speculated to be held this year, also lead to people adopting a wait-and-see attitude and reluctant to commit to big ticket item purchase due to fear and uncertainty over the country s future economic policy direction. Meanwhile, management agrees that the relaxation of eligibility criteria to purchase PR1MA homes will create direct competition to affordable housing developers. With the household monthly income eligibility now increase to RM15,000 (from RM10,000 previously) and the moratorium on renting and selling imposed on PR1MA house buyers slash to 5 years (from 10 years previously), we believe all this have made PR1MA homes very attractive to first time home-buyers. We see Hua Yang as one of the biggest loser following this development, as the group s projects are mainly cater for first time home buyers. Forecast Post briefing, we remain unconvinced of the group s ability to secure another RM175mn sales in 4QFY17 alone amid the soft market conditions and strict lending environment. Risks are further delays in Astetica launch, given the highrise market in Klang Valley remains relatively weak. Our FY17/18/19 sales assumptions are revised lower by 26%/12%/18% to RM241mn/384mn/485mn from RM326mn/434mn/590mn respectively. We also adjust our progress billings assumptions given slower-than-expected revenue recognition in 9MFY17. Accordingly, our FY17-19 earnings are adjusted downwards by 14-21%. Nevertheless, 4QFY17 net profit should come in relatively stronger at around RM16-23mn, driven by expected completion of Sentrio Suite in Feb-17. As management emphasizes the importance of conserve cash reserves for future landbanking opportunities, we assume a dividend payout of 20% for FY17-19, as compared to the group s average payout of about 30% over the past 5 years. Our FY17-19 DPS forecasts are 3.5sen-4.0sen, representing dividend yields of 3-4%. Valuation Following the change in earnings, our target price is reduced to RM1.09/share from RM1.29/share previously, based on unchanged CY17 P/E target multiple of 6x. We see the group s sluggish sales performance to continue putting some strain on its future earnings. Maintain Sell. Page 3 of 5

4 Appendix 1: FY17 Project Launches Projects GDV (RM mn) Target Launch Date Remarks Klang Valley Astetica Residences - Service Apartments & Retail 368 1Q CY17 Soft launched in Sep. Johor * Taman Pulai Indah Taman Pulai Hijauan 15 2Q CY Q CY17 Launched Rumah Mampu Milik Johor, comprising 97 double storey terrace houses Launching 2 affordable home schemes in 1Q CY17 Perak Bandar Universiti Seri Iskandar 105 1Q CY17 Launching 3 affordable home schemes in 1Q CY17 Mainland Penang Meritus Residensi - Service Apartments & Retail Total Q CY17 * Denotes launched Soft launched in Nov Page 4 of 5

5 Earnings Summary (RM mn) Profit & Loss (RMm) Balance Sheet (RMm) YE Mar f 2018f 2019f YE Mar f 2018f 2019f Revenue Fixed assets EBITDA Others Dep. & amortisation (1.0) (2.5) (1.2) (2.3) (3.3) Total Net finance cost (1.5) (0.6) (2.2) (2.1) (2.0) Cash PBT Others Taxation (42.9) (34.6) (24.7) (21.6) (22.3) CA MI Net profit Total assets , , ,087.1 Core net profit Reported EPS (diluted) (sen) ST debt Core EPS (diluted) (sen) Other liabilities PER (x) CL GDPS (sen) Shareholders' funds Div Yield (%) LT borrowings EV/EBITDA (x) LT liabilities Total long term Liabilities Cash Flow (RMm) Total Equity and Liabilities , , ,087.1 YE Mar f 2018f 2019f PBT Ratio Adjustments (34.0) (45.3) (24.7) (21.6) (22.3) YE Mar f 2018f 2019f Dep. & amortisation Profitability ratios Changes in WC (19.1) ROE (%) Operational cash flow ROA (%) Capex (69.5) (67.2) (60.0) (30.0) (30.0) EBITDA Margins (%) Others (2.6) (17.4) (10.0) (10.0) (10.0) PBT Margins (%) Investment cash flow (72.2) (84.6) (70.0) (40.0) (40.0) Debt raised/(repaid) 18.9 (38.2) (10.0) (10.0) (15.0) Liquidity ratios Equity raised(repaid) Current ratio (x) Dividend (44.9) (34.3) (14.1) (12.3) (12.3) Quick ratio (x) Others Financial cash flow (26.0) (72.5) (24.1) (22.3) (27.3) Leverage ratios Net cash flow (20.8) Total liabilities / equity (x) Net debt / Equity (x) Growth ratios Assumptions Revenue (%) 14.5 (1.3) (29.7) (15.0) 6.4 YE Mar f 2018f 2019f Pretax Profit (%) 36.6 (5.7) (34.3) (12.8) 3.2 New Sales (RM mn) Core net earnings (%) 34.5 (0.4) (36.1) (12.8) 3.2 Property Development Margins (%) Total assets (%) Stock Recommendation Guideline BUY : Total return within the next 12 months exceeds required rate of return by 5%-point. HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point. SELL : Total return is lower than the required rate of return. Not Rated: The company is not under coverage. The report is for information only. Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium. 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 5 of 5