First Sponsor Group - Phillip Securities 2022-08-04: Property Development Outlook Turns Positive


First Sponsor Group - Property Development Outlook Turns Positive

  • First Sponsor Group (SGX:ADN)'s 1H22 profit of $71.3mil was above our estimates, at 60.5%. The beat came from Property Holding (PH).
  • Housing policy relaxation measures in Dongguan drove sales higher. Sales accelerated in the 1.5 months after the implementation of the relaxation measures.
  • RMB271.6mil (S$55mil) in net auction proceeds recovered from RMB330mil in defaulted loans. The potential disposal of Pudong Mall, which we estimate in FY23 could see a further recovery of the defaulted loans.
  • Upgrade First Sponsor Group to ACCUMULATE from NEUTRAL with unchanged SOTP-based target price of S$1.39. Catalysts for a target price upgrade are a recovery in the Chinese property market and its China hotel portfolio.

The Positives

First Sponsor Group's 1H22 profit of $71.3mil above our estimates, at 60.5%.

  • The beat came from Property Holding (PH). PH’s profit was driven by the acquisition of the Dutch Bilderberg hotel portfolio it acquired on 2 May 2022 and the overall improvement in RevPAR of its hotel portfolio due to fewer COVID-19 restrictions. All of its hotel properties reported positive profits for 1H22.
  • Interim dividend of S$0.011 was in-line with our forecasts.

Housing policy relaxation measures in Dongguan drove sales higher.

  • Buyer sentiment in the Dongguan residential market improved after two rounds of housing policy relaxation by the local municipal authorities in May 2022. 190 residential units of its project in Time Zone were sold in 1.5 months after relaxation measures were announced. This was significantly higher than the 139 residential units sold in the first 4.5 months of 2022.
  • We believe this bodes well for the two residential projects it has targeted to launch in 2H22, the Hefu project and Phase 1.2 of its Time Zone development, both in Dongguan.

RMB271.6mil in net auction proceeds recovered from RMB330mil in defaulted loans.

  • First Sponsor Group recovered a portion of the proceeds in April 2022 from the mortgaged properties. The estimated net proceeds of RMB271.6mil however, is insufficient to cover the outstanding loan principal, default and penalty interest and other fees, resulting in an estimated shortfall of RMB160.4mil, with a book exposure of RMB112.8mil left to be collected.
  • First Sponsor Group will continue to pursue the shortfall via the court process. In other words, if the Group fails to recover such an amount, the negative P&L impact on the Group would be RMB112.8mil.

Potential recovery from the disposal of Pudong Mall.

  • The legal title of the Pudong Mall as well as net auction proceeds of the Pudong Villa are expected to be transferred to the Group in 3Q22. As First Sponsor Group managed to win the title of the mall through an auction process, we believe there is upside to the valuation of the mall at the end of the year when a valuation is done.
  • We believe First Sponsor Group will attempt to divest the mall to recover the shortfall, which we estimate to be in FY23e.

The Negatives

Primus Bay residential apartment blocks receive muted response at launch.

  • The pre-sales for the three residential blocks in Panyu, Guangzhou, with 177 units was launched on 26 May this year, with only 11% of the units sold as the weak macro backdrop weighed on sales. ASP of RMB26,200sqm is on the lower end of the spectrum, but we expect pricing to remain stable as First Sponsor Group will launch the smaller units in 2H22, which should support pricing.

Potential impairment of hotels in 2H22 as rates soar.

  • With inflation rates in Netherlands (+8.6% y-o-y) and Germany (+7.5% y-o-y) soaring in June and July respectively, management has guided for potential impairments arising from higher rates. The ECB recently raised rates for the first time in 11 years, with a larger than expected rise of 50bps. That said, we expect the impairments, if any, to be offset partially by the continued recovery of RevPAR and occupancy in Europe.


Property outlook in China continues to be uncertain.

  • Falling property prices in China have resulted in a slowdown in demand. Some developers have also resorted to lowering prices to clear inventory, adding to the downward pressure in the property sector. New home prices fell 7.2% y-o-y in June, bringing the year-to-date decline to ~42% as sentiment remained weak.
  • However, there are signs that the Chinese government may be shoring up support for its property market. Management guided that the banks have started lending aggressively in 1H22, which caused its customers to re-finance its rates with the banks instead. This has caused a more rapid repayment of its loan book in 1H22. Buying sentiment in the Dongguan residential property market has improved after two rounds of housing policy relaxation by the local municipal authorities in May 2022. On 4 July, a further round of relaxation measures was implemented, which we believe bodes well for the properties it will launch in 2H22.
  • In 2H22, we expect First Sponsor Group to launch the Hefu project (Dongguan), Time Zone development (Dongguan) and Plot E1 of Millennium Waterfront project (Chengdu).

Strong balance sheet to capitalise on new opportunities.

  • First Sponsor Group is backed by a strong balance sheet, substantial unutilised committed credit facilities and potential equity infusion from the exercise of outstanding warrants. Its gearing improved to 0.18x in 1H22 vs 0.38x for FY21, as it realised a substantial infusion of cash ~S$258mil in PRC loan repayment during the period.
  • We continue to model for these repayments to continue in FY22e and FY23e against the banks more aggressive lending policy. All of this will further strengthen the cash resources of First Sponsor Group and enable it to capitalise on any new business opportunities when they arise.

Upgrade to ACCUMULATE from NEUTRAL with unchanged SOTP-Target price of S$1.39.

Terence Chua Phillip Securities Research | https://www.stocksbnb.com/ 2022-08-04
SGX Stock Analyst Report ACCUMULATE UPGRADE NEUTRAL 1.390 SAME 1.390