First Sponsor Group - Phillip Securities 2021-08-04: Another Acquisition In Greater Bay


First Sponsor Group - Another Acquisition In Greater Bay

  • First Sponsor Group (SGX:ADN)'s 1H21 results in line at 56%/57% of FY21e revenue and net profit, boosted by property development. 1H21 unrecognised gross development value was S$559mn. Share of gross development value for unlocking was S$3.4bn, before Bolong Bay and City Tattersalls.
  • New Boyong project increases First Sponsor Group’s exposure to Dongguan where residential demand is still hot. Hotel portfolio likely to recover, led by non-city hotels. Property financing’s PRC loan book grew 22% h-o-h on the back of more development and financing deals.
  • Maintain ACCUMULATE on First Sponsor Group with unchanged SOTP-based target price of S$1.56. We factored an increase in valuation for the development and financing segments, offset by net debt and East Sun divestments. FY21e revenue and net profit estimates were raised by 4% and 9% respectively to reflect better hotel performance and lower tax expenses.

First Sponsor Group's 1H21 - The Positive

Strong property development revenue.

  • Group revenue increased 50.6% y-o-y from a 262% y-o-y jump in property development. This was largely attributable to the handover of 619 SOHO loft units at Plot F of its Millennium Waterfront project. Hotel revenue was up 19.6% as a result of a relaxation of COVID-19 travel and lockdown restrictions in the PRC, Netherlands and Germany. This was offset by lower property-financing revenue following an absence of a S$15.8mn one-off loan-restructuring income arising from the refinancing of loans to 33%- owned FSMC last year. As such, gross profit came in lower, as property financing has the highest gross margins.
  • First Sponsor Group's 1H21 profit after tax increased 18.7% y-o-y, capturing a higher share of profits from associates and JVs and lower tax expenses.

First Sponsor Group's 1H21 - The Negative

Tenant exploited loopholes.

  • In May 2021, TVHG Budget Amsterdam II B.V. (TVHG), the tenant of two hotels at the Arena Towers in Amsterdam Southeast, commenced preliminary relief proceedings against First Sponsor Group’s wholly-owned subsidiary for partial rent suspension until such time when COVID-19 restrictions are lifted or the hotels’ turnover returns to pre-COVID-19 levels.
  • On 9 June 2021, an Amsterdam preliminary relief judge issued a ruling in favour of First Sponsor Group, rejecting all of TVHG’s claims. While the deadline for TVHG’s appeal has expired, there is no assurance it will not pursue further legal action to seek rent discounts. First Sponsor Group, however, has a 3-month bankers’ guarantee and a clause to terminate its contract with TVHG should the tenant default on its lease obligations. Given this, First Sponsor Group believes that TVHG will continue to pay its rents in the meantime.


Dongguan residential market remains hot

  • Despite cooling measures by the Dongguan municipality, Dongguan’s residential units are still well-sought by developers and buyers alike. In 1H21, there was a tender for a plot of land in Dongguan. Bidders were required to employ at least a certain number of employees to ensure that they were not paper companies and place RMB1bn as deposits. Even though its location pales in comparison with Humen, residential prices are still transacted at around RMB30,000 psm ppr in the region. The authorities received over RMB200bn of deposits. Simply put, there were over 200 bidders for the project. Underscoring the area’s popularity, First Sponsor Group has divested equity interests in some of the properties in East Sun Wan Li portfolio at 100-219% premiums over their book value.
  • 1H21 development sales yet to be recognised amounted to S$559mn. First Sponsor Group’s share of GDV yet to be unlocked from existing projects was S$3.4bn. This included its new Humen Boyong project which is expected to add S$310mn to its gross development pipeline, excluding the renamed Bolong Bay Garden (formerly New Humen) and City Tattersalls projects. Both are expected to contribute more to property financing.
  • On 28 July 2021, First Sponsor Group set up a JV to acquire and redevelop two adjacent plots of mixed-use land in Humen, Dongguan. The project will have saleable GFA of 110,000 sqm, comprising 75% of residential GFA and 25% of commercial GFA. All-in land cost is estimated at RMB15,000 psm ppr. This marks the group’s fourth acquisition in the Greater Bay Area this year. Construction and presales are expected to commence in 4Q21 and 3Q22 respectively. First Sponsor Group has an effective stake of 48% in the JV.

European hotels expected to pick up.

  • As COVID-19 infection rates have dwindled from their recent high, lockdown measures in the Netherlands have been eased once again. From 27 July 2021, all vaccinated European citizens from the European Economic Area and Schengen Zone are allowed to enter the country, regardless of their countries’ infection rates. The change follows successful vaccination campaigns in these countries, where about 50% of their populations have been vaccinated.
  • We anticipate a greater recovery for First Sponsor Group’s hotels in the coming quarter. In particular, those located at city fringes should perform better on the back of increased leisure travel during the summer holidays.

Property financing’s PRC order book growing; auction sale of defaulted loan expected.

  • Excluding a one-off loan-restructuring income from the refinancing of FSMC loans and establishment fee from the provision of a A$370 mn construction facility to fund the redevelopment of the City Tattersalls Club development project last year, 1H21 property financing income increased S$8.5m y-o-y. This was spearheaded by higher average returns from its PRC property-financing business. 1H21 average PRC loan book grew 22% h-o-h with the aid of more development and financing deals.
  • Separately, First Sponsor Group had commenced legal action in November 2020 against a borrower group in a Shanghai court to recover a RMB330mn loan and associated interest under two cross-collateralised loans with an average loan-to-value ratio of 53%.
  • In March 2021, First Sponsor Group entered into a settlement with the borrower group. Principal terms of the court ruling included a repayment schedule for the loan principal and interest, including default interest. However, the borrower group failed to make its fourth instalment payment fully on 30 June 2021.
  • On 12 July 2021, First Sponsor Group filed a court application to seek an auction sale of the mortgaged assets in accordance with the court ruling. We are expecting principal and interest to be fully collected by next year, subject to court-application success.

Maintain ACCUMULATE and SOTP-based target price of S$1.56.

Tan Jie Hui Phillip Securities Research | https://www.stocksbnb.com/ 2021-08-04