But robust take-up suggests rosier times ahead. Within a quarter, Pan Hong’s pre-sales surged 219.7% to RMB 503.6m as at 24 May 09. All its three existing projects in Nanchang, Huzhou and Hangzhou generated strong take-up, ranging from 48 – 95% (refer to Figure 1). More notably, we understand that the robust sales were attained without having its initial selling prices trimmed. The increased demand was underpinned by favourable government policies, better accessibility to mortgage financing, improved macroeconomic outlook and aggressive marketing by developers. Buyers were mostly owner-occupiers.
Strategy switch and outlook. Management plans to launch Phase 1 of Hua Cui Ting Yuan (HCT) somewhere in Jun 09, as well as begin constructing HCT Phase 2 and Yichun Project somewhere during FY10. To strengthen its brand equity and stand out amidst the increasingly competitive landscape, management is contemplating to apply HCT’s townhouse/villa concept to its other suburban projects. Aside from product differentiation, we believe the concept also encompasses lower construction costs and shorter development-to-sales cycle.
Earnings refined. For Pan Hong’s projects in Huzhou and Hangzhou, we have tweaked our revenue recognition schedule to reflect the positive take-up, as well as 100% achieved sales by end-FY10. Inventory clearing time period for NHK Phase 2 has been shortened to two years (three years previously). To account for the recent easing price downtrend, we have also adjusted downwards our price decline for the subsequent six months (from -8.0% to -5.0%), but maintained our previous assumption of a price recovery beginning 1Q10 (+18.0% for three consecutive years). FY10F EPS thus increases by 13.7% to RMB 56.9 ¢. FY11 projections have now been introduced.
Upgrade to BUY at S$0.43. The 17.5% YoY jump in Jan – Apr 09’s sold GFA (to 176.25m sqm) implies that buyers are now back in the hunt for properties. On the ground, management is also seeing improved sentiments and healthy level of inquiries for its unlaunched projects. With 2.4m sqm of residential landbank remaining, we believe Pan Hong is well-positioned to benefit from the improved dynamics and strong real estate fundamentals within China’s lower tier cities. In light of the improved buying sentiments and China’s macroeconomic outlook, as well as Pan Hong’s healthier balance sheet (net gearing = 0.17x, vs. SGX-listed peers’ 0.43x), we are now applying a lower discount of 30% to its new base case end-FY09 RNAV of S$0.62. Upgrade to BUY at S$0.43.
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