As domestic developers have resumed land acquisitions at more aggressive pricing over the past few months, concerns are mounting over rising land costs and developers’ cash flows. However, we believe Pan Hong is well-positioned to capture growing demand for private housing, particularly in second/third-tier cities in China, where land cost increases still trail the larger developed cities.
Higher earnings visibility in 2010-11. Pan Hong’s earnings visibility is much improved, thanks to record sales in Jan-June and revenue deferred from FY08-09.
In fact, most developers we track have bagged 47.7-97.2% of our estimated revenue for FY09 and 5.5-35.2% of our FY10 revenue. Higher earnings visibility and stronger-than-expected sales may lead to more earnings upgrades in the following months and underpin developers’ share-price performances.
In line with Hong Kong-listed peers, we expect developers’ RNAV discounts to narrow. We now tag a 10% RNAV premium to first-tier China property developers, instead of parity earlier. We also reduce RNAV discounts from 20% to 10% for second-tier developers and from 50% to 25% for smaller developers.
Stock price has rallied from its low in Mar 09, but investors’ interest has yet to wane, lifted by the current euphoria in the sector.
We ascribe a 25% RNAV (S$0.82/share) discount for the stock, leading to a target price of S$0.61. Our above-consensus RNAV reflects: 1) our revised price assumptions; 2) our revised completion schedule; and 3) a lower discount rate. We resume coverage of Pan Hong with a BUY recommendation.
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