APAC Realty - RHB Invest 2018-08-31: Spreading Its Wings In China; BUY

APAC Realty - RHB Securities Research 2018-08-31: Spreading Its Wings In China; Buy APAC REALTY LIMITED SGX:CLN

APAC Realty - Spreading Its Wings In China; BUY

  • APAC Realty’s entry into Hainan market offers a stepping stone to tap into the vast potential of China’s real estate market. While near-term earnings contribution may not be significant, the move provides lot of intangible benefits in terms of understanding the dynamics of real estate agency business in China, and potentially cross-selling its Singapore projects to Chinese clients.
  • In our view, these diversification strategies are pivotal for long-term earnings sustainability and will help mitigate cyclical vagaries of Singapore’s real estate market.
  • The stock currently trades at reasonable 8.8x FY18F P/E vs global peers – 11.7x, and offers healthy yields of > 6%.
  • Maintain BUY and Target Price of SGD0.77, offering 33% upside.

New JV to boost project sales in China.

~ SGinvestors.io ~ Where SG investors share
  • APAC Realty announced its foray into Hainan, China by entering into a JV (40% stake) with 
    1. Hainan Zhong Zhi Sheng He Real Estate Investment Consulting Co Ltd 海南中置盛和房地产投资顾问有限公司 (40% stake) and 
    2. Bei Guo Tou (Shanghai) Equity Investment and Fund Management Co Ltd 北国投(上海)股权投资基金管理有限公司 (20% stake).
  • The new JV – to be called ERA Hainan Real Estate Marketing Co Ltd (ERA Hainan) 海南易安居房地产营销有限公司 – will conduct brokerage and resale brokerage businesses, and establish training for and the licensing of real estate agents in Hainan.
  • ERA Hainan registered capital is CNY20m (SGD 4m) and APAC would fund its share of SGD1.6m from internal funds.

Ready pipeline access from JV partners.

  • Hainan Zhong Zhi Sheng He Real Estate Investment Consulting Co Ltd  (ZZSH) has been in real estate consultancy and marketing services since 2015 with about 50 employees. It has acted as an agent for 12 projects and secured marketing rights to six upcoming projects with > 10,000 units in the pipeline. As a part of the JV, all existing project-sale business from ZZSH would be transferred to the new entity.
  • We understand that ZZSH business was profitable last year and has about 10-15% of market share in project sales. The other JV partner, Bei Guo Tou (Shanghai) Equity Investment and Fund Management Co Ltd (BGT), is an private equity venture capital player and fund manager with investment directions including proptech and real estate.

Minimal near-term earnings contribution, but we see intangible benefits.

  • With a muted outlook for the Hainan property market on various cooling measures, we do not expect any significant earnings contribution in the near-term. However, we believe the entry will offer a lot of intangible benefits for APAC in understanding real-estate agency dynamics and paves way for future expansions in China.
  • APAC would also be able to help JV partners in the re- sale market and offers training expertise, thereby increasing agent productivity.

Other regional presence.

  • To recall, APAC has exclusive ERA regional master franchise rights in 17 countries in the Asia-Pacific region, of which, it currently has presence in nine countries with > 16,000 agents in 627 offices. Management has plans to deepen its presence in Indonesia via a potential acquisition of its franchisee and build its own brokerage arm.

Maintain BUY and Target Price of SGD 0.77

  • Maintain BUY and Target Price of SGD 0.77, based on our DCF-model – WACC: 8%, TG: 0%.
  • We currently have not factored in any earnings contribution from the above JV pending more details.
  • APAC is currently trading at 8.8x FY18F P/E. Its closest peer, PropNex (SGX:OYY), is trading at 12.7x historical FY17 P/E, a 60% premium to APAC’s FY17 P/E.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-31
SGX Stock Analyst Report BUY Maintain BUY 0.770 Same 0.770