TA SecuritiesA Member of the TA Group

C O M P A N Y U P D A T E

Friday, 04 March, 2011

FBMKLCI: 1,056.88 MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048 Sector: Property

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Hua Yang Berhad

TP: RM2.03 (+88%) An Undiscovered Gem in The Property Industry Last traded: RM 1.08

THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* BUY

Tan Kam Meng, CFA

+603-2072-1277 ext:1644

kmtan@ta.com.my

www.taonline.com.my

We are initiating coverage on Hua Yang Berhad (HuaYang) with a BUY

recommendation. We derived our target price based on a PE multiple of

6x CY11 EPS, which is at 50% discount to our target PER of 12x for small-

cap property stocks. This represents an attractive upside of 88%.

Hua Yang Berhard (HuaYang) is a homegrown property developer with a

market capitalization of RM116mn. Listed in 2002, HuaYang currently has 5

on-going developments namely One South and Symphony Heights in the Klang

Valley, Bandar Universiti Seri Iskandar in Perak, Taman Pulai Indah in Johor

and Senawang Link in Seremban.

The Chairman Tan Sri Dato’ Seri Dr. Ting Chew Peh is an independent non-

executive director of HuaYang. He was the Secretary-General of MCA during

1990-2005. Meanwhile, the current day-to-day operation of HuaYang is at the

helm of CEO, Ho Wen Yan, who is an architect by profession. Currently, the Ho

family owns 33% of HuaYang.

Investment case

1) Niche player to benefit from 2011 Budget;

2) One South to be the key earnings driver;

3) Trading at steep discount to NTA.

We project Hua Yang to chalk up new sales of RM300mn for FY11, RM355mn

for FY12 and RM336mn for FY13. Based on a chew rate of 43-58%, we expect

net profit of RM25mn for FY11, RM40.4mn for FY12 and RM52.7mn for FY13.

Earnings Summary (RM’mn)

FYEMar 31 FY09 FY10 FY11F FY12F FY13

Re ve nue 100.0 103.5 162.9 273.7 351.1

EBITDA 13.9 16.8 35.5 57.7 74.6

EBITDA ma rgi n (%) 13.9 16.2 21.8 21.1 21.3

Pre ta x profi t 12.6 15.8 33.8 54.6 71.2

Ne t profi t 8.7 11.6 25.0 40.4 52.7

Core ne t profi t 8.7 11.6 25.0 40.4 52.7

EPS* (s e n) 8.1 10.7 23.2 37.4 48.8

EPS growth (%) 32.8 32.3 116.5 61.3 30.5

PER (x) 13.3 10.1 4.7 2.9 2.2

GDPS* (s e n) 2.1 2.5 4.0 4.0 4.0

Di v yi e l d (%) 1.9 2.3 3.7 3.7 3.7

Core ROE (%) 4.8 6.1 12.1 17.2 19.0

* Adjus te d for 1:5 bonus i s s ue

Share Information

Bloomberg Code HYB MK

Stock Name HUAYANG

Stock Code 5062

Listing Main Market

Share Cap (mn) 108.0

Market Cap (RMmn) 116.6

Par Value 1.00

52-wk Hi/Lo (RM) 1.27/0.625

12-mth Avg Daily Vol ('000 shrs) 349.0

Estimated Free Float (%) 54.44

Beta 0.49

Major Shareholders (%)

Heng Holdings - 30.65

Cham Poh Meng - 14.91

Forecast Revision

FY11 FY12

- -

25.0 40.4

Consensus 24.4 28.7

102.6 140.7

Financial Indicators

FY11 FY12

Net Debt / Equity (%) 30.8 25.8

-9.3 5.3

Price / CFPS (x) nm 20.25

ROE (%) 12.1 17.2

ROA (%) 7.5 10.6

1.9 2.3

0.6 0.5

Share Performance (%)

Price Change HUAYANG FBM KLCI

1 mth (1.8) (1.6)

3 mth 13.1 0.4

6 mth 6.2 5.0

12 mth 45.6 17.4

na

FCPS (sen)

NTA/Share (RM)

Price/NTA (x)

Forecast Revision (%)

Net profit (RMm)

TA's / Consensus (%)

Previous Rating

TA SecuritiesA Member of the TA Group 04 Mar-11

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Background

Hua Yang Berhard (HuaYang) is a homegrown property developer with a

market capitalization of RM116mn. Listed in 2002, HuaYang has completed

>10,000 commercial and residential properties worth RM1.16bn over the past

30 years. Currently, it has 5 existing developments namely One South and

Symphony Heights in the Klang Valley, Bandar Universiti Seri Iskandar in

Perak, Taman Pulai Indah in Johor and Senawang Link in Seremban (see

Appendix 1). On top of that the group has 2 new projects in the pipeline

namely, Taman Pulai Hijauan and Polo Park Land in Johor.

Major shareholders and management

The Chairman Tan Sri Dato’ Seri Dr. Ting Chew Peh is an independent non-

executive director of HuaYang. He was the Secretary-General of MCA during

1990-2005. Meanwhile, the current day-to-day operation of HuaYang is at the

helm of CEO, Ho Wen Yan, who is an architect by profession. Currently, the Ho

family owns 33% of HuaYang.

Operating track record

HuaYang’s FY10 earnings surged 32% YoY to RM11.6mn underpinned by

higher progress billings and margin improvement. For 9MFY11, the group has

recorded a net profit of RM16.9mn, representing 46% above FY10’s total net

profit. During this period, the group has locked in RM173mn sales and

subsequently secured an en-bloc sale of 73 units of retail shops at One South

worth RM105mn in Jan-11. The group is on track to achieve its sales target of

RM300mn for FY11.

Chart 1: Financial Performance

0.00

5.00

10.00

15.00

20.00

25.00

0

20

40

60

80

100

120

140

2007 2008 2009 2010 9MFY11

%RM'mn

Revenue PBT PBT margin

HuaYang’s net cash level dwindled in FY09, sending the net gearing ratio to

15% from 4% in FY08. This can be attributed to the capital outlays for

landbanking exercises. In 2008, HuaYang spent RM40mn to acquire a 16.65-

acres leasehold land (the project is now known as One South) located along the

Sungai Besi Highway. Also, the company spent RM7mn for another land

acquisition in Johor in 2008.

The landbanking exercise in 2008 has helped to boost sales in subsequent years

(see Chart 2). As shown below, sales picked up significantly from 2009

onwards. In addition, the launch of One South in FY11 has boosted HuaYang’s

sales to the record level of RM170.5mn in 9MFY11 (note that 9MFY11 sale does

not reflect the en-bloc sale worth RM105mn, which was completed in 4QFY11).

Share Price relative to the FBM KLCI

Source: Bloomberg

TA SecuritiesA Member of the TA Group 04 Mar-11

Page 3 of 8

Chart 2: Sales Increased Significantly Since FY09

0

20

40

60

80

100

120

140

160

180

FY2009 FY2010 9M2011

RM'mn

Taman Pulai Indah Bandar Universiti Seri Iskandar

Symphony Heights One South

Senawang Link

Industry Structure

In mid 2009, the property industry has entered into its first phase of recovery,

underpinned by 1) low mortgage rates; 2) easy financing schemes launched by

developers such as 5/95 or 10/90 schemes. We saw launches of mid- to high-

end properties mushrooming to cater for the increasing demand from

upgraders. In 2010, NAPIC data shows a significant increase in demand for

properties that priced at >RM500,000/unit. We believe the overwhelming

demand is not due solely to the current low mortgage rates and the easy

financing schemes, but also to the change in consumer preference toward

lifestyle living.

In Budget 2011, there are a number of new measures introduced to encourage

buying interest like: 1) 50% exemptions on stamp duty on instrument of

transfer and loan agreement on a house price not exceeding RM350,000 for

first-time home buyers; 2) Cagamas to provide guarantee on the down payment

of 10% for houses below RM220,000 for first time home buyers with household

income less than RM3,000 per month; 3) Raising the maximum loan eligibility

of civil servants to RM450,000 compared with RM360,000 currently. We

expect this to drive property sales and prices higher in the near term, especially

for those low- to mid-end houses. This bodes well to HuaYang as a developer

of affordable properties.

Investment case

1) Niche player to benefit from 2011 Budget;

2) One South to be the key earnings driver;

3) Trading at steep discount to NTA.

Niche player to benefit from 2011 Budget

HuaYang is expected to roll out RM2bn new launches for the next two years,

focusing on the affordable range, ie: properties priced in between RM90k-400k,

to cater for the overwhelming demand from the relatively large underserved

target market. Having said that, the products offered by the group, typically

those in Perak and Johor, are generally priced in between RM100k-300k/unit.

As such, we expect the company to benefit from the housing incentives such as

the 50% waiver on stamp duty on instrument of transfer and loan agreement

proposed by the government in 2011 budget. We understand that the waiver is

extended to only first-time home buyers who constitute up to 70% of the

group’s total customers.

TA SecuritiesA Member of the TA Group 04 Mar-11

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One South to be the key earnings driver

One South is located along the busy KL-Seremban highway, facing the Mines

Lake and Palace of The Golden Horses Hotel. This development is accessible via

a trunk road in front of the New Nouvelle Hotel (previously known as Mint

Hotel). It is well connected to shopping centres (Jusco Taman Equine, Mines

Shopping Fair and South City Plaza), hospital (Serdang Hospital), and

universities (UPM).

With a total GDV of RM750mn, One South will be developed in 5 phases,

featuring 384 units of retail shops and offices (Phase 1), 1,261 units of serviced

apartment (Phase 2-4), and two block of office towers (Phase 5). The group has

soft-launched office units in Feb-2010 and has seen 30% take-up rate for 6-

months after the launch. For the shop units, HuaYang has sold the entire 73

units retail shops on an en-bloc basis for RM105mn early this year.

HuaYang has soft launched two blocks of serviced apartment with an average

built-up area of 1,000sf. The indicative price in between RM300-400psf is

comparable to other development in the vicinity. Referring to iProperty.com,

we surmise that the current market value of high-rise residential in Seri

Kembangan and Sri Petaling to be in the region of RM250-465psf based on the

asking price for Bayan Villa, East Lake Condominium and The Heritage

Residence in Seri Kembangan and Endah Promenade in Sri Petaling. According

to management, the company has sold almost all units in one of the blocks,

thanks to the easy 10/90 financing scheme.

Being the key earnings contributor, we project One South to contribute RM92-

108mn to FY11-13 sales. Earnings wise, we project this development to

contribute up to RM27mn-28mn EBIT for FY12-13 based on a margin of 22%.

Trading at steep discount to NTA

Based on the group’s NTA/share of RM1.87/share, the stock is currently

trading at a steep discount of 0.6x P/NTA. Hua Yang recorded RM278mn sales

for 10MFY11 with unbilled sales of RM194.4mn as at Jan-2011. We project Hua

Yang to chalk up new sales of RM300mn for FY11, RM355mn for FY12 and

RM336mn for FY13. Based on a chew rate of 43-58%, we expect net profit to

grow at a promising rate of 30-116% to RM25mn for FY11, RM40.4mn for FY12

and RM52.7mn for FY13.

Assuming HuaYang would distribute 4 sen dividend for FY11-13, yielding 4%,

NTA is expected to increase to RM1.92/share in FY11, RM2.26/share in FY12

and RM2.71/share in FY13. At the current trading price of RM1.08, this

represents 0.4-0.56x FY11-13 NTA/share, which is at steep discount if

compared to its peers’ NTA/share of 1.31x.

Valuation

HuaYang’s CY11 PE multiple of 3.2x is unjustifiable given our projected

earnings growth rate of 30-116% YoY for FY11-13. Also, the PE is relatively

low if compared to small- to mid-cap property companies under our coverage

(refer to Table 1). Despite the exponential growth in future earnings, we

acknowledge the risk factors given that HuaYang’s earnings base and market

capitalization are small. Also, its relatively thin daily trading volume of 442k

shares/day renders the stock unattractive to its peers. As such, we peg a

discount of 50% to our target PER of 12x for small- to mid-cap property

companies to factor in the risk components and derive a fair value of

RM2.03/share, which implies a P/NTA of 0.9x. Given a return of 88%, we

initiate coverage on HuaYang with a Buy recommendation.

TA SecuritiesA Member of the TA Group 04 Mar-11

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Table 1: Peer Comparison

Company Call Price TP

(RM) (RM) CY11 CY12 CY11 CY12 FY11 FY12 FY11 FY12

SP Setia Buy 6.00 7.05 31.0 82.4 15.4 8.5 8.3 13.5 3.3 3.7

Mah Sing Buy 2.35 3.27 55.6 27.0 11.0 8.6 18.2 20.1 3.2 3.8

Glomac Buy 1.70 2.46 15.7 3.6 8.3 8.0 10.4 10.2 5.3 5.3

KSL Buy 1.69 2.80 41.6 43.0 7.2 5.1 10.2 12.9 3.0 3.0

Encorp Buy 0.81 1.08 304.4 21.5 5.4 4.5 13.7 14.9 6.2 6.2

Crescendo Buy 1.32 1.81 14.7 27.9 5.8 4.6 6.9 7.3 7.6 7.6

Sector PER (Simple Average) 9.5 6.9

Sector PER (Weighted) 10.8 6.2

Small Cap PE 7.0 5.8

Hua Yang Buy 1.08 2.03 64.2 35.7 3.2 2.4 12.1 17.2 3.7 3.7

Earnings growth (%) PER (x) ROE (%) Div Yield (%)

Table 2: Income statement FYEMar 31 FY09 FY10 FY11F FY12F FY13

Revenue 100.0 103.5 162.9 273.7 351.1

EBITDA 13.9 16.8 35.5 57.7 74.6

Depreciation (0.6) (0.4) (0.5) (0.9) (1.2)

Amortisation (0.0) (0.1) (0.2) (0.3) (0.3)

Finance cost (0.7) (0.5) (1.0) (1.9) (1.9)

Pretax profit 12.6 15.8 33.8 54.6 71.2

Net profit 8.7 11.6 25.0 40.4 52.7

Core net profit 8.7 11.6 25.0 40.4 52.7

EPS (sen) 8.1 10.7 23.2 37.4 48.8

EPS growth (%) 32.8 32.3 116.5 61.3 30.5

PER (x) 13.3 10.1 4.7 2.9 2.2

GDPS (sen) 2.1 2.5 4.0 4.0 4.0

Div yield (%) 1.9 2.3 3.7 3.7 3.7

Core ROE (%) 4.8 6.1 12.1 17.2 19.0

EBITDA margin (%) 13.9 16.2 21.8 21.1 21.3

PBT margin (%) 12.5 15.2 20.8 19.9 20.3

Net margin (%) 8.7 11.2 15.4 14.8 15.0

TA SecuritiesA Member of the TA Group 04 Mar-11

Page 6 of 8

Table 3: Balance sheet FYE Mar 31 2009 2010 2011F 2012F 2013F

PPE 6.6 6.9 11.4 15.6 19.4

Land held for development 131.2 147.5 177.5 207.5 237.5

other 19.9 28.5 28.3 28.0 27.7

Total non current assets 157.7 182.9 217.2 251.0 284.5

Property development costs 38.3 68.7 68.7 68.7 68.7

Inventories 6.6 7.9 8.0 8.1 8.1

Trade and other receivables 33.3 45.2 46.6 48.0 49.4

Current tax assets 0.8 0.0 0.0 0.0 0.0

Deposit and cash 12.1 3.7 9.3 30.8 44.8

Other 3.5 2.7 2.7 2.7 2.7

Total CA 94.7 128.2 135.3 158.2 173.8

Trade and other payables 16.4 21.9 22.6 23.3 24.0

Borrowings 2.7 16.8 16.8 16.8 16.8

Others 4.2 30.4 30.4 30.4 30.4

Total CL 23.3 69.2 69.8 70.5 71.2

Net current asset 71.4 59.0 65.5 87.7 102.6

Share capital 90.0 90.0 108.0 108.0 108.0

Share premium 6.7 6.7 0.0 0.0 0.0

Reserves 89.2 99.1 108.5 144.6 193.0

Total shareholders' funds 185.9 195.8 216.5 252.6 301.0

MI 0.5 1.8 1.8 1.8 1.8

Term loan 37.8 40.0 60.0 80.0 80.0

Others 4.8 4.4 4.4 4.4 4.4

Total non current liabilities 42.6 44.4 64.4 84.4 84.4

Table 4: Cash flow statement

FYE Mar 31 2009 2010 2011F 2012F 2013F

PBT 12.6 15.8 33.8 54.6 71.2

Op profi t be fore cha nge i n WC 12.7 16.7 35.5 57.7 74.6

CFO 10.3 12.7 25.0 40.8 53.3

Ca pe x (30.0) (33.6) (35.0) (35.0) (35.0)

Othe rs 1.6 0.2 0.0 0.0 0.0

CFI (28.3) (35.1) (35.0) (35.0) (35.0)

Ne t borrowi ngs 31.2 10.2 20.0 20.0 0.0

Di vi de nd (1.7) (1.7) (4.3) (4.3) (4.3)

CFF 29.5 8.5 15.7 15.7 (4.3)

Change in cash 11.4 (13.9) 5.7 21.4 14.0

Table 5: Financial analysis

FYE Mar 31 2009 2010 2011F 2012F 2013F

Current ratio (x) 4.1 1.9 1.9 2.2 2.4

Net gearing (%) 15.2 26.7 30.8 25.8 17.0

NTA/share (RM) 2.0 2.1 1.9 2.3 2.7

P/NTA (x) 0.5 0.5 0.6 0.5 0.4

ROE (%) 4.8 6.1 12.1 17.2 19.0

ROA (%) 3.7 4.1 7.5 10.6 12.1

FCF per share (sen) (16.7) (20.7) (9.3) 5.3 17.0

EV/EBITDA (x) 10.5 10.0 5.2 3.2 2.2

TA SecuritiesA Member of the TA Group 04 Mar-11

Page 7 of 8

Appendix 1: On-going projects

One South, Seri Kembangan

GDV: RM750mn

Leasehold

Selling price:

- Retail : RM550-750psf

- Office: RM350-750psf

Mixed development comprising:

- 1,261 units of serviced apartment : soft

launched 61 units

- 384 units of shops/Office : sold 73 retail

shops en-bloc

- 2 block office towers : future development

Symphony Heights, Selayang

GDV : RM206mn

Leasehold

Selling price: RM135,200-RM306,500 per units

Serviced apartment:

- 544 units (phase 1) : Sold

- 219 units (phase 2) : Sold

- 183 units (phase 3) : Sold

Bandar Universiti Seri Iskandar, Perak

GDV: RM721mn

Leasehold

Selling price:

- Residential: from RM119,800/unit

- Commercial: from RM260,000/unit

Land size: 777 acres

- Developed: 255 acres (GDV: RM158mn)

- On-going: 29 acres (GDV: RM53mn)

- Undeveloped: 523 acres (GDV: RM510mn)

TA SecuritiesA Member of the TA Group 04 Mar-11

Page 8 of 8

Taman Pulai Indah, Johor

GDV: RM818mn

Freehold

Selling price:

- Residential: RM134,000-RM300,000/units

- Commercial: from RM150,000/units

Land size: 477 acres

- Completed: 286 acres (GDV: RM465.4mn)

- On-going: 103 acres (GDV: RM134mn)

- Undeveloped: 88 acres (GDV: RM198mn)

Senawang Link, Negeri Sembilan

GDV: 45mn (85 units shops and factories)

Leasehold

Selling price:

- Phase 1: from RM251,000/unit

Commercial and industrial development comprising:

- Phase 1: 22 units 11/2 terrace factories – 30%

sold

Disclaimer

The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein.

for TA SECURITIES HOLDINGS BERHAD (14948-M)

MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048

(A Participating Organisation of Bursa Malaysia Securities Berhad)

Kaladher Govindan – Head of Research