KSH Holdings (KSHH SP) - UOB Kay Hian 2017-05-31: FY17 In Line With Expectations, Healthy Outlook Despite Increased Uncertainty

KSH Holdings (KSHH SP) - UOB Kay Hian 2017-05-31: FY17 In Line With Expectations, Healthy Outlook Despite Increased Uncertainty KSH HOLDINGS LIMITED ER0.SI

KSH Holdings (KSHH SP) - FY17 In Line With Expectations, Healthy Outlook Despite Increased Uncertainty

  • KSH’s FY17 results were in line with our expectations with lower associate contributions affecting bottom-line. 
  • Nonetheless, KSH enjoys a healthy earnings outlook with a S$340m orderbook and balance sales of S$163.2m. 
  • While delayed for better re-planning, the 1.9m-sqm Phase I of its Gaobeidian project should still provide the next leg of growth with RNAV estimate of S$343.8m but we would like to re-iterate related risks. 
  • Maintain BUY but reduce our SOTP target price to S$1.12.



RESULTS


FY17 results in line with expectations. 

  • KSH Holdings’ (KSH) FY17 results were in line with our expectations. 
  • While net profit fell 33.0% yoy, this was largely due to the lack of contribution from associates. Despite falling revenue, profit from operations before associate and JV contributions actually rose 78.7% yoy from S$18.3m to S$32.7m. 
  • Gross margin also improved 6.4ppt, in part thanks to KSH’s efforts to boost productivity and efficiency as it seeks high-yield projects.

Earnings fell due to lower property development profits, Gaobeidian preliminary costs and impairment loss on unsold properties. 

  • KSH recorded lower associates profit of S$8.5m in FY17 due to: 
    1. a S$12.2m yoy drop in share of profit recognised from Sequoia Mansion, 
    2. preliminary costs of S$3.9m incurred in the Gaobeidian project in China, and 
    3. S$5.0m provision for impairment loss on unsold properties for financial prudence. 
  • We are not concerned by these one-off costs as they may eventually be recovered in the subsequent years when the Gaobeidian project kickstarts or sentiment in the Singapore property market improves.


STOCK IMPACT


Healthy visibility ahead with S$340m orderbook and S$163.2m sales balance. 

  • KSH’s orderbook stands healthy at S$340m and provides more than a year’s earnings visibility.
  • Its JV and associates have launched 15 projects (excluding Gaobeidian) with around 95.8% sold. The balance sales proceeds of S$163.2m, which will be progressively recognised, will help underline KSH’s future profits.

Re-planning the Gaobeidian project. 

  • KSH’s Gaobeidian development is undergoing some re-planning involving the merging and formation of land plots to better enhance land use and reduce the setback area. However, this would also mean that the target launch has to be postponed (tentatively to Dec 17) and contributions will be delayed by 6 to 12 months as new development plans will have to be resubmitted to the authorities.

Gaobeidian to provide next leg of growth. 

  • Aided by the announcement of the Xiongan New Area, Gaobeidian prices have surged considerably. We see the 1.9m sqm in Phase I (of the total 5.3m sqm) of the Gaobeidian project providing the next leg of growth for KSH.
  • Assuming an end-17 launch date, a 60% tax rate (including income, land appreciation and value added tax) and a low launch price of Rmb15,000/sqm, our new RNAV for KSH is S$343.8m (at a WACC discount of 7%). For every Rmb1,000/sqm increase, we expect KSH’s profits to increase by S$31m.

Property restrictions on China’s first-tier cities lead to price surge in other cities.

  • With property restrictions on China’s first-tier cities, Chinese buyers are turning to lowertier cities, causing prices there to boom. According to China’s National Bureau of Statistics, China’s new-home prices rose 0.7% mom in Apr 17 with prices in lower-tier cities like Tangshan rising 2.2% mom. Accordingly, a Bloomberg Intelligence index shows shares of 22 large Chinese developers soaring 37% ytd.

Sale of Prudential Tower nearly completed. 


  • In Apr 17, KSH announced the latest sale of its investment in Prudential Tower, bringing total stake sale to 97.5%. Share of profits is expected to be recognised in FY18.


EARNINGS REVISION/RISK


Revising earnings downwards. 

  • To account for the delay in the expected launch of projects in Gaobeidian, we cut our FY18-19 net profit forecasts by 12.2% and 6.0% respectively.

Risk from Gaobeidian projects. 

  • We would like to re-iterate the risks from KSH’s Gaobeidian project. As seen from the Gaobeidian project delay, risks could include execution and regulatory issues. However, it is a rare event that China decides to set up a new special economic zone and Gaobeidian is still a project with great potential for KSH.


VALUATION/RECOMMENDATION

  • Maintain BUY but we reduce our SOTP target price to S$1.12. 
  • KSH’s outlook generally appears healthy. However, there is greater uncertainty and we opt to be conservative.


SHARE PRICE CATALYST

  • Gaobeidian project. KSH’s fortunes are largely tied to its Gaobeidian project. News of successful execution and higher prices in the Gaobeidian area should help KSH’s share price.




Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-31
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.12 Down 1.18



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